Inflation has been top of mind for many consumers, business owners and investors throughout 2022, and it remains central to our outlook for the coming year. In our 2023 Capital Markets Forecast: Inflationary Vortex, Wilmington Trust’s Chief Investment Officer Tony Roth and members of his team note that we are seeing compelling signs of disinflation in the pipeline and expect the headline Consumer Price Index (CPI) to decelerate to 3 percent by mid-2023. Further, we explore three key trends — the tight U.S. labor market, China’s policy and demographic challenges, and the cost of the green energy transformation — and how they are expected to impact global inflation. To better understand how these trends might inform your portfolio decisions, we encourage you to read our report.
Our inflation projection — critical for identifying investment opportunities — is for a deceleration from about 7 percent at the end of 2022 to about 3 percent by mid-2023. How might inflation and other factors impact whether there will be a recession in 2023? We see three possibilities:
• A mild recession is our expectation. Although inflation will fall, the Fed is focused on keeping interest rates higher until inflation has been erased, likely maintaining a 5 percent or slightly higher fed funds rate. We expect two quarters of 1 percent to 1.5 percent economic contraction and S&P 500 earnings to decline at least 5 percent to 10 percent.
• A soft landing, where economic growth slows but does not contract, would likely mean the Fed limits rate hikes to a peak of 5 percent and cuts rates in the second half of 2023.
• A severe recession assumes wages, housing and the broader services sector continue to exert upward pressure on the CPI. The Fed takes its policy rate up to 6 percent or higher, unemployment rises above 5.5 percent, and the economy contracts at a rate of 2.5 percent to 3 percent for over two quarters.
What could this mean for your portfolio?
Both stocks and bonds are more attractive, and reasonably priced growth stocks could outperform, although the tight labor market means labor costs weigh more heavily on the industrial, tech, communication services and financial sectors. According to Macrobond, energy remains attractive, despite its stunning 91 percent outperformance over the S&P 500 in 2022. Bond investors are finally seeing decent interest payments due to current yields — one positive to higher interest rates.
For emerging markets, we call for a nuanced approach to investing in Chinese equities, which comprise roughly one-third of emerging markets stocks. Heightened policy risks will require greater selectivity and reap potential reward from active managers with a knowledge of and presence in the country. Our outlook for international developed economies is grim, and Germany is likely to lead the broader European Union into a recession that could last through most of 2023.
With diversification as the linchpin of your investment plan and our philosophy, we move forward with confidence that overall portfolio returns will soon be positive once again. Again, we encourage you to read our full 2023 forecast and speak with Northern New England Market Leader Scott Carpenter or connect with an investment advisor if you’re concerned about how these influences may impact your portfolio.
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Wilmington Trust Investment Advisors, Inc.’s Capital Markets Forecast is provided for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a recommendation or determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the investor’s objectives, financial situation and particular needs. The investments or investment strategies discussed herein may not be suitable for every investor. The material is not designed or intended to provide legal, investment or other professional advice, since such advice always requires consideration of individual circumstances. If legal, investment or other professional assistance is needed, the services of an attorney or other professional should be sought.
The forecasts presented herein constitute the informed judgments and opinions of Wilmington Trust about likely future capital market performance and are subject to change without notice. Forecasts are subject to a number of assumptions regarding future returns, volatility and the interrelationship (correlation) of asset classes. Assumptions may vary by asset class.
Actual events or results may differ from underlying estimates or assumptions, which are subject to various risks and uncertainties.
No assurance can be given as to actual future market results or the results of Wilmington Trust’s investment products and strategies.
The estimates contained in this presentation constitute Wilmington Trust’s judgment as of the date of these materials and are subject to change without notice. The information in this presentation has been obtained or derived from sources believed to be reliable, but no representation is made as to its accuracy or completeness.
Securities listed or mentioned are provided for illustrative purposes only and are not intended to be representative of current recommendations or holdings. It should not be assumed that these securities were or will be profitable.
Investing involves risk and you may incur a profit or a loss. Past performance cannot guarantee future results. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful.
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