Economic Outlook 2023

A Long-Range Economic Look at the Year 2023
Every year-end since our founding, our team conducts an in-depth analysis of the U.S. economy and financial markets to develop an Annual Economic Outlook. This forecast serves as a blueprint for our investments throughout the year.

About The Speakers

Neil Craft
Client Relationship Manager

Fall Ainina, Ph.D., CFA
Director of Research / Vice President
Investment Committee Member

Neil Craft: Hello and welcome to the James Market Clarity Podcast. I'm your host, Neil Craft. And today on episode 29, I'm joined by Dr. Fall Ainina to review our economic outlook for the year ahead. Dr. Fall, welcome.

Dr. Fall Ainina: Good morning, Neil. Thank you for having me.

Neil Craft: Oh, it's great to have you again, Dr. Fall, our listeners always appreciate your insights and thoughts on the market, and we're excited for another episode today. Another year has come and gone, it was definitely a tumultuous one at that for the economy and the markets looking back at 2022, and we are about a month into 2023. As we begin, Dr. Ainina, let's take a look at the economy and perhaps talk about what might be in store for this year.

Dr. Fall Ainina: Well, Neil, the US economy is currently in a late cycle environment. The odds of recession are elevated and rising as we begin this new year. Consumer spending remain resilient, boosted by a tight labor market. The consumer balance sheet is strong as they have built up a cash reserve over the past couple of years. Inflation is still a concern, but the excess cash should provide a buffer to rising costs.

Neil Craft: Yes, I know inflation is still a concern in the mind of many, we have seen some cooling on inflation year over year, looking at the core and things like that, but it's still a concern. What are the leading indicators telling us for 2023?

Dr. Fall Ainina: Unfortunately, Neil, they are pointing toward a downturn. These include the struggling housing market due to the Fed rapid monetary tightening, and rising mortgage rate which negatively impact housing affordability. Additionally, the manufacturing sector is showing sign of contraction, while consumer sentiment are level at near historical low. The Chinese COVID persistent problems and the Russia-Ukraine war continue to be a headwind for global economic growth. If and when these issue improve, we could see global GDP advancing.

Neil Craft: Definitely something to hope for. Dr. Ainina, we appreciate your thoughts on the economy. I know that listeners and investors always want to know how these thoughts and your outlook on the economy might be reflected in the stock market.

Dr. Fall Ainina: Well, in our view, the market may face major headwind in early 2023 as earning gets downgraded and the economic deterioration shows up in the hard data, such as the leading indicator, while the labor market remains strong and cash in household bank account is high, most of the evidence support a slowing economy.

Neil Craft: Okay. Alright. Well, do you have any good news for us yet?

Dr. Fall Ainina: Well, Neil, we believe there is an opportunity for long-term investor to pick a great buying opportunities as the markets start to price in economic recovery. The timing of this inflection point will depend on the incoming data from the aforementioned, leading economic indicator. So staying nimble, having cash on hand, being open-minded, and most of all humble is paramount as the uncertainty is unprecedented.

Neil Craft: Yeah. Absolutely. Well, thanks for your insights. If we could pivot towards the bond market now, we know 2022 was a tough year in those markets as well.

Dr. Fall Ainina: Yeah, well, it was a very challenging year for fixed-income investment. In fact, it may go down as the worst year for bonds since 1931.

Neil Craft: Wow.

Dr. Fall Ainina: And the first time bonds were down by double digits in a year. This higher yield and lower price were due to higher inflation rate and the subsequent reaction by the Federal Reserve. The silver lining though, Neil, is the higher yield investor can get now from fixed-income security. For the first time in many years, the investor can now purchase a one year T-bill and earn more than 4%. This is a much better return than 0.25% last seen at the end of 2021.

Neil Craft: Absolutely.

Dr. Fall Ainina: After a long wait bond may be an attractive alternative, compared to the dividend yield on the S&P 500 Index.

Neil Craft: It's been some time since we've seen that type of level of attraction in bond returns.

Dr. Fall Ainina: True. It is. Yep. Go ahead.

Neil Craft: So given the, I guess, deteriorating economic conditions you mentioned, how would you recommend positioning oneself for the year ahead?

Dr. Fall Ainina: Well, Neil, it's advisable to have a defensive posture and a fixed income favoring treasury security with moderate duration, and highly rated municipal bonds. Historically, treasury instrument do well in challenging economic environments. Municipal bonds have benefited from a sizable cash buffer accumulated from COVID stimulus plans.

Neil Craft: Well, thank you again, Dr. Fall. As we wrap up today, it's clear you have a picture of what's likely to occur this year, given the extensive research you've done with your team. But what could go wrong? What could happen perhaps that might take this outlook off course?

Dr. Fall Ainina: Well, if the Fed pivots in a major way and sooner than expected, that will be a factor. If the US Consumer and Corporation are more resilient than expected, if China fully reopen, that will boost global growth. For example, if they have solved the problem with COVID infection rate they have now, the European recession not as severe as forecasted. And if you see positive development in Russia-Ukraine conflict, and overall US economic growth holding up better than leading indicators suggest.

Neil Craft: To follow up on your first point, you mentioned the Fed pivoting in a major way. What would you consider a major pivot in terms of what the Fed might do?

Dr. Fall Ainina: Well, the Fed is expected to meet next week, Tuesday and Wednesday, and the market expects them to increase interest rate by point 0.25%. If they pause after that, we consider that pivoting. Usually when they pivot, that's mean they change course. Changing course here means they will pause for a while before start to lower interest rate. And I think that's very important for the market because basically for the last year, the bear market, that you saw, was mainly induced by this rising interest rate that the Fed was engineering to slow down the economy.

Neil Craft: Dr. Ainina, thank you as always for your time and your research. It's much appreciated.

Dr. Fall Ainina: No problem, Neil. My pleasure. Thank you.

Neil Craft: If you would like to learn more about wealth management at James Investment or receive a copy of our economic outlook, please visit our website at James Investment: Planning, Investing, Advice.


Typical Allocation Range

Equity: 40% - 70%
Fixed Income: 30% - 60%
Cash: 1% - 15%

Small, mid, and large cap stocks
Benchmark: 25% Russell 1000® Index , 25% Russell 2000® Index and 50% Bloomberg Barclays Aggregate U.S. Intermediate Government/Credit Bond Index

The Balanced strategy has a target range of 40% - 70% in equities, with a mix of small, mid, and large capitalization stocks. We weight the stock exposure toward the most advantageous market capitalizations based on our research.

Sector analysis in an important part of our portfolio management process. Changes in sector weightings are made based on our analysis.

We believe that having the maximum flexibility to follow our research is the key to adding value to our clients' accounts.