Webinar replay: Spring investment outlook
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
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.
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.
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.
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.
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.
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.
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.
Knowing your investment goals and risk tolerance helps us diversify your portfolio with a mix of equities, bonds and real assets.
January 6, 2023
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