At a glance
Rumors of the global economy’s and historically riskier asset classes’ demise have so far proved premature. As consumer and business activity remain healthy, we now turn to a period where consensus estimates are for a shrinking global economy in 2023’s second half. We came into this year concerned about how consumers would withstand interest rate increases from global central banks including the U.S., Europe, the United Kingdom, Canada and other major economies still experiencing uncomfortable inflation trends. Higher interest rates mean higher borrowing costs for businesses, consumers and governments, potentially thwarting spending plans. U.S. consumers remain anchored by strong personal balance sheets and a still-robust labor market, with inflation-adjusted wage gains on a steady uptrend since June 2022 despite central banks remaining biased to tighten liquidity to stave off inflation.
In addition to higher interest rates as a concern for this year, liquidity measures — the amount of capital flowing through the economic system — presented another challenge for spending and corporate profits. Now that Congress suspended the domestic debt ceiling until after next year’s Presidential election, the Treasury Department is actively restocking its depleted coffers by issuing bonds, and that action takes capital out of the hands of private investors. Further, the banking system has avoided additional flare-ups at the individual bank level, which has provided some relative calm, although investors remain focused on sector-level issues like commercial real estate loans coming due and any deposit issues at individual firms.
We have upgraded our outlook on the path forward for diversified portfolios but retain a careful eye on several variables, including the labor market, central bank policy, an overly exuberant lift to certain sectors in the global equity market and liquidity trends as the year unfolds. Historical valuations for global stocks are registering close to longer-term averages despite very high interest rates competing for investor dollars. Commodities, the strongest outperforming macro asset class last year, have been the opposite this year, with some market observers suggesting their weakness points to foreboding economic activity. We would characterize our forward-looking views as skeptical participants seeking further confirmation that the durable trends reflected in global stock and riskier bonds are sustainable, and as always, we will keep you updated with our developing views.
― Eric Freedman, Chief Investment Officer, U.S. Bank