Drivers Impacting The Markets Over The Next Few Quarters

• Economy health. Overall, my sense is that our economy has caught a cold. It isn’t a flu bug and it’s certainly not COVID. But the economy seems to me to be in a sluggish period, needing some chicken noodle soup and maybe even a nap. I know that’s not a very technical definition, but it seems to me to be an appropriate metaphor.
• Analyst predictions. I believe many analyst’s projections are too high. I’m not convinced that they’re realistic compared to the actual economic conditions on the ground today. Some analysts are calling for 5.7% earnings growth and 3.4% revenue growth in Q4, 2022. I doubt this will happen for most corporations.
• Unemployment. I expect unemployment to go up over the next couple of quarters. This is one of the downsides of the Fed’s interest rate hikes, which often have a muted impact on consumer spending. This, in turn, can cause corporations to lay off workers as demands for their goods and services decrease. In the technology sector, we are seeing sizable layoffs. This trend will likely continue for some time. However, unemployment still remains at historic lows in the US.
• Housing. Most families will be less likely to buy if they are uncertain about their incomes. This could mean that home sales might curtail in the coming months. Interest rates will likely continue to rise, impacting favorable buying conditions. The net effect could be home prices dropping by as much as 15-20% in the coming quarters. I don’t anticipate decreases in rent in this period.
• Federal Reserve policy. The Fed’s interest rate adjustment policy could help balance inflation, housing and even employment. Interest rates will likely peak within the next quarter or two. Thereafter, they could go down. The Fed’s expressed goal was to cool off an overheating economy. That goal could very well be achieved soon.
• Zero COVID. China’s lockdown policy could continue to effect supply chains and cost-effective international parts and supplies. This could have a negative economic impact globally. So much of China’s debt is tied to real estate projects. But their real estate growth is slowing. They’ve seen slower growth this year than in the past 30 years.
• Recession. As I’ve stated elsewhere, technically we are in a recession—if we define it as two consecutive quarters of GDP decline. Europe and the UK are likely in the same boat. But I do not think this means that a 1930’s style depression is imminent.
• Inflation. As of the time of writing this article, inflation is at 8%. I think it could go down by 1-2% in 2023. Gas prices have steadily declined over the last couple of months. Groceries and home supplies seem to have stabilized or gone down as well. In other words, the worst of what we’ve seen from inflation could be behind us. Real disposable income could rebound in 2023.

Everything I’ve said above is speculative analysis on my part. This analysis is informed by my years of experience in this field as well as by the thought leaders and indexes I follow on a consistent basis. All of this is subject to change because I cannot predict the future.

How Might This Impact Long-Term Investors?

Overall, I expect 2023 to be a down year compared to the last several years. I don’t anticipate an unbroken upward trajectory of growth as volatility in the markets will probably be with us for much of the year. However, there are forces in play that could turn things in a positive direction. For instance, if China defeats COVID and their workforce rebounds, global supply chains might also rebound, driving down inflation and enhancing international trade.

The 60-40 balanced portfolio (60% stocks, 40% bonds) has been a reliable model for most investors for many years now. In 2022, the 60-40 portfolio did not perform as well as in past years. At the time of writing this article, the bond market is down 14.5%. However, the balanced portfolio, as a risk-adjusted model for real returns (after inflation), still seems to me the best option for most long-term investors. Why do I say this?

The last two quarters of 2023 and going into 2024 could be strong. There are enough indicators in play to suggest that negative headwinds could be countered by positive headwinds. This could mean an attractive rebound is not that far away. A balanced portfolio will participate in that rebound while also mitigating the risks of an unbalanced portfolio or active investing. Staying balanced is prudent, by my estimation.

What Do I Recommend Right Now?

Given everything I’ve said above, what do I recommend?

• Stick to your plan. The long-term investor could lose if they convert to cash during this period of “economic cold.” The financial plans we design for clients anticipate periods of economic decline and expansion.
• I don’t recommend large changes to investment portfolios. Now is probably the time to hold steady and watch carefully—which we do on your behalf all the time.
• If your family nest egg is not large enough or has been depleted, it’s a good idea to build it back up. A good rule of thumb is to have six months of living expenses within easy reach. This should also enhance your peace of mind.
• Now is probably not the best time to buy real estate.

Wrap Up

None of us can predict the future. However, at Strait & Sound we believe long-term investors who follow a disciplined plan are best positioned to achieve their long-term wealth goals. The financial plans we design for clients are constructed to most likely achieve these goals. We are vigilant and proactive in keeping our clients’ portfolios balanced and in-line with their stated objectives and risk tolerances. If you have any questions about the analysis put forward here, please reach out to your Strait & Sound financial advisor.