Articles | August 28, 2023

Investment Outlook: Glass Half Full or Glass Half Empty?

This proverbial question aptly sums up the dichotomy of views related to growth, interest rates, inflation and the consumer, to name a few.

As we enter the later stages of the economic cycle, it is common to have disparate views on the future trajectory of the markets, as economic data becomes more nuanced and the timing of when the cycle might bottom and turn into a new one is murky.

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Despite all the headlines churning back and forth each day, there are a couple of areas where “consensus” views have formed. Such as:

  • We are in the later innings of the Federal Reserve’s rate rise cycle.
  • We are in the late stage of the economic cycle.
  • While inflation may not be at levels to declare victory, progress is real and should continue.

While there is no consensus on the back half of 2023 in terms of GDP growth and soft landing or recession, the general acknowledgement is that the Federal Reserve has succeeded in slowing economic growth. The question remains, it is enough? Or is it too much?

As we take stock of the first half and look towards the back half of the year, here are some key metrics to consider:

  • Labor strength. U.S. unemployment remains near all-time low of 3.6 percent but is up from the low of 3.4 percent (albeit not much).
  • Consumer strength. The consumer continued to support growth in first half but moved a bit away from spending on goods. Meanwhile, services were strong.
  • Retail. Data was strong in the first half but is softening, as reflected in June with personal consumption data flat and revised downward in April and May.
  • Earnings. They are expected to decline, as well as margins. Passing through increasing costs to the consumer seems to have peaked. Wage pressure has continued leading to many of the layoffs being announced in corporate America, although it is softer over the last few months.
  • Growth. On a worldwide basis, it has diverged (creating opportunities), but has been more resilient than expected to date. China’s recovery expectations have declined in line with recent data and the Central Bank has room for further stimulus above the recent cut in key lending rates. The eurozone has strong employment, and currently is being helped by stabilized energy prices below levels most people thought were not possible when the war broke out in Ukraine. Inflation is still higher than the U.S. but has slowed (10.6 percent to 6.1 percent in May) with certain inflation points (shelter, wages) stickier than desired.

So, is the glass half full or is it half empty?

Consensus views on the second half of 2023 are divided. This outlook gives the scenarios for glass half full (soft landing) and glass half empty (recession).

What is our outlook?

We remain cautious about what is in store for equities, especially on areas of the market that have outperformed in the first half, so we encourage rebalancing back to targets.

We remain positive on the outlook for fixed income assets and since we are in the late innings of the rate cycle; some stability should bring yield into focus.

For the first time in a long time, we have seen a divergence in performance among private assets. Namely, real estate valuations so far in 2023 have seen negative valuations, and while private credit and private equity saw revaluations, most returns are still positive for the first half of 2023.

What does our outlook cover?

The August 2023 Investment Outlook includes tables that provide a snapshot of our forward-looking observations on the direction of specific asset classes.

Specifically, for 22 asset classes, we select one of five outlook signals based on our 12–18-month perspective relative to our 10+-year CMAs. The signals range from an above-normal return outlook to a below-normal return outlook.

The asset classes include equities, fixed income and these alternatives:

  • Hedge funds
  • Multi-asset class strategies
  • Private equity
  • Real estate
  • Infrastructure
  • Commodities
  • Energy
  • Timber
  • Farmland

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