Finding potential upside in markets and the economy

We’re not saying we’re in the same league as, say, Nostradamus when it comes to predicting the future, but the team at InvestmentNews has a pretty good idea of what advisors should be on the lookout for in 2023.

Despite financial markets staggering at the end of 2022 amid recession fears, the uncertain direction of Federal Reserve monetary policy, and the growing reality that Washington, D.C., can toss a wrench into any plan at any time, there’s no shortage of rosy outlooks predicting better times ahead.

Of course, a key element in upbeat forecasts is long-term outlooks coupled with short-term vagueness.

For example, a tip of the hat goes to Parametric chief investment officer Thomas Lee for citing the silver lining of 2022 as “a banner year for tax-loss harvesting” as the stock market spent the year deep in the red.

Lee balanced that nugget with a caution regarding the “Fed’s restrictive monetary stance” in 2023.

He sees a slowing economy leading to higher unemployment and ultimately a “negative wealth effect” from declining asset prices.

At J.P. Morgan Asset Management, the outlook also points to a looming recession while struggling to avoid saying a recession is coming.

“Lower inflation and slower growth over the next few years seem very likely,” the J.P. Morgan outlook states.

Fixed income, against the backdrop of a dreadful 2022, looks better in the year ahead, assuming the Fed stops raising rates, according to J.P. Morgan.

Meanwhile, the outlook from The Vanguard Group is for central bankers to “continue their aggressive tightening cycle into early 2023 before pausing as inflation falls and job losses mount.”

Vanguard expects U.S. bonds to return between 4.1% and 5.1% per year over the next decade, which is up dramatically from a forecast of between 1.4% and 2.4% a year ago.

On the equity side, Vanguard says stocks have yet to drop “materially below their fair value, which they have historically done during recessions.”

Sam Stovall, chief investment strategist at CFRA, said the slowing economy will continue to drag down corporate profits. He cites the S&P Capital IQ consensus earnings estimates that the S&P 500 will rise 3.2% in 2023. That’s down from the 5.1% estimate from a year ago for 2022.

Looking past 2023 to 2024, however, “points to a recovery of more than 10% in S&P 500, with gains seen for all sectors but energy,” Stovall said.

GROWTH EXPECTATIONS

At Northern Trust Asset Management, recession isn’t in the forecast but slowing growth is, according to Michael Hunstad, chief investment officer for global equities.

“Our expectation is that inflation will come down over the next five years, but will remain elevated over the next couple of years,” he said.

Hunstad is looking for the Fed to tack on another 75 basis points to interest rates next year but said the long view looks rosier.

“Our five-year forecast [for equities] is a little lower than the long-run average,” he said. “We expect positive revenue growth over the next five years.”

To read more articles in this series:

• Expect giant branch offices at IBDs to flex their muscle
• Gary Gensler’s SEC agenda faces steep GOP opposition
• Growth or flexibility? Fintechs must choose
• Here’s how inflation and philanthropy could give women a boost in ’23
• Handicapping sequence risk and recession for the retirement set