Webinar replay: Spring investment outlook

At a glance

Asset prices remain volatile following 2022’s gyrations that saw both stocks and bonds simultaneously decline in value over a calendar year for the first time since stock and bond index measurement began. The current capital market environment includes questions about financial sector health, global interest rate policy and economic trajectory. Investors await answers to these questions, but we expect more waiting for definitive answers and likely more volatility ahead.

Our overall view remains that the confluence of higher interest rates inside a resilient yet gradually slowing economic landscape will lead to a tougher corporate profit backdrop. That said, we anticipate a more shallow dip in corporate and consumer activity, shaped by how high central bank target interest rates ascend to thwart inflationary pressures and how long those rates remain elevated. Higher interest rates pressure asset prices, consumer and business demand, and as we have witnessed with recent banking sector casualties, elevated interest rates can adversely impact functioning within select institutions. If we see less credit extension and tighter financial conditions, economic growth impulses may further decline, hampering consumer and business activity. We anticipate the Federal Reserve and other major central banks to remain steadfast in their attempts to thwart inflation through higher interest rates, the current financial sector issues to remain contained and for economic growth to weaken but not to a point of a prolonged recession, per our U.S. Bank Economics group’s forecast. Investors tend to overshoot with optimism and pessimism, and we expect opportunities to emerge as answers evolve in coming quarters.

Eric Freedman, Chief Investment Officer, U.S. Bank

Global economy

Quick take: The global economy started 2023 on a solid note, with a warm winter and softer energy prices supporting consumer activity, though recent bank failures raise growth concerns. China’s “reopening” from coronavirus lockdowns may provide a lift later this year, though the broad trend is toward slow growth along with elevated inflation.

U.S. inflation measures

Sources: U.S. Bank, Bloomberg

U.S. equity market

Quick take: Despite positive first quarter performance, we maintain a cautious near-term outlook for U.S. equities due to persistent inflation, rising interest rates and uncertain 2023 earnings growth while financial stability concerns complicate the Fed’s ongoing battle with inflation.

S&P 500 last 12 months price/earnings ratio

Sources: U.S. Bank, Bloomberg, March 6, 2003

International equity markets

Quick take: Warm weather and sufficient gas supplies helped Europe avoid a winter energy crisis, but persistent inflation, higher interest rates and structural headwinds temper our return outlook for foreign equities.

Bond markets

Quick take: High-quality bonds offer compelling return opportunities and can position portfolios for slowing economic growth. Headwinds to bond prices could fade this year as we near a potential peak in the Fed’s policy rate, which would support longer-term bonds, but elevated inflation in the meantime warrants normal interest rate sensitivity.

Ten-year Treasury yield

Sources: U.S. Bank, Bloomberg, Federal Reserve

Real assets

Quick take: Real asset categories exhibit mixed fundamentals amid varied growth drivers. Private real estate appraisals have been slow to reflect the current property market environment while public markets re-priced quickly. Economic uncertainty increases the attractiveness of global infrastructure’s consistent and growing cash flows, while slowing growth and inflation weighs on commodity prices.

Alternative investments

Quick take: Hedge fund managers are finding good opportunities in 2023, with higher interest rates leading to increased market volatility, creating significant stock price movements. The current economic uncertainty may favor defensive positioning with less overall exposure to the equity and credit markets. We expect many hedge fund managers to keep their overall market exposure low, but that stance does not mean managers will avoid risk.

Private markets

Quick take: Business fundamentals helped sustain private equity performance, resulting in less downward pressure on private equity investment performance compared to other asset classes. While we anticipate additional downward pressure on privately held company prices, reflecting the continued rise in interest rates, we continue to find compelling opportunities while applying our thematic and opportunistic framework in combination with a deep bottom-up due diligence process.

This commentary was prepared April 2023 and represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are not intended to be a forecast of future events or guarantee of future results and is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. Any organizations mentioned in this commentary are not affiliated or associated with U.S. Bank or U.S. Bancorp Investments in any way.

Indexes shown are unmanaged and are not available for investment. The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 widely traded stocks that are considered to represent the performance of the stock market in general. The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. The Personal Consumption Expenditures (PCE) Price Index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. The S&P CoreLogic Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate nationally.

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The information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific investment advice and should not be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation.

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U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.

Diversification and asset allocation do not guarantee returns or protect against losses.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. 

Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in fixed income securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.

Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer’s ability to make principal and interest payments.

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The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes.

There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

Hedge funds are speculative and involve a high degree of risk. An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage and short sales, which can magnify potential losses or gains. Restrictions exist on the ability to redeem or transfer interests in a fund.  A hedge fund’s offering memorandum and related materials contain important information about investing in the fund, including the investment strategies, fees, expenses, and levels of risk involved in the fund’s investment strategies.  Potential investors are encouraged to review a fund’s offering memorandum and related materials with tax and legal advisors before investing in a hedge fund.

Private equity investments provide investors and funds the potential to invest directly into private companies or participate in buyouts of public companies that result in a delisting of the public equity. Investors considering an investment in private equity must be fully aware that these investments are illiquid by nature, typically represent a long-term binding commitment and are not readily marketable. The valuation procedures for these holdings are often subjective in nature.

Private debt investments may be either direct or indirect and are subject to significant risks, including the possibility of default, limited liquidity, and the infrequent availability of independent credit ratings for private companies.