The 2023 Investment Outlook and Investment Planning
Happy New Year! As we begin 2023, we would like to share a comprehensive outlook that revolves around effective investment planning. The year 2023 brings with it a changing economic landscape, where legislative changes and global events influence the current market conditions.
In particular, the Secure Act 2.0, passed by Congress, has introduced significant alterations in the retirement planning arena. This includes the postponement of Required Minimum Distributions (RMDs) until age 73 in 2023. This will be followed with further extensions to age 75 over the next several years.
Additionally, penalties for not taking RMDs have been reduced, offering retirees more flexibility in managing their finances. Read to learn more about the other changes triggered by The Secure Act 2.0.
Understanding the Current Environment
To better understand our perspective on the 2023 economic environment, let's take a closer look at the current landscape. In the chart below, we have outlined our current economic probabilities, employing a rate of change perspective. Our investment approach is grounded in analyzing the incremental rate of change in both GDP and inflation, using a four-quadrant approach to optimize your investment portfolio.
Probability of a Profit-Based Recession
In Q1 2023, we currently estimate a 62% probability of remaining in a decreasing growth and decreasing inflation environment. This assessment leads us to anticipate a profit recession, where companies may encounter challenges in maintaining profits, servicing their debts, and sustaining current valuations.
Our Investment Process
Our investment strategy is rooted in effective risk management, centering on growth, inflation, and policy considerations. By closely monitoring these variables, we can strategically position assets to maximize risk-adjusted returns.
Examining Growth
When assessing global growth, we anticipate a continued slowdown, despite the alleviation of pandemic-related supply chain disruptions. Many nations teeter on the brink of recession, driven by central banks' efforts to raise interest rates to combat inflation. Geopolitical factors, such as the ongoing conflict in Ukraine and potential spikes in COVID-19 cases, could further impede economic progress. These global conditions make growth investing difficult in the short term.
In the United States, data reveals that consumers have depleted their savings, while credit card balances have reached all-time highs. As borrowing costs rise for businesses, coupled with an appreciation of the USD, many enterprises may experience profit declines. High wage expenses and reduced profits could exert additional pressure on valuations, potentially causing a decline in GDP through the second quarter. Therefore, the possibility of a profit-based recession looms large, and our portfolio positioning reflects this outlook.
Analyzing Inflation
Inflation reached its peak last year, but core components, particularly labor and shelter costs, remain stubbornly high. A job market characterized by more job openings than job seekers continues to exert upward pressure on wage inflation. Meanwhile, the housing market, reliant on rent values, faces challenges due to low inventory and cautious buyers.
These factors suggest that the shelter component of inflation data may remain elevated for 3-5 more months. Despite recent declines in inflation rates, the overall inflation picture remains concerning, prompting the Federal Reserve to continue its fiscal tightening policies. Consequently, we believe the risk of recession surpasses the risk of high inflation.
Evaluating Policy
Policy changes often impact investment strategies.
The Federal Reserve confronts a challenging path ahead. It's vital to recognize that the Fed has contributed to the present economic conditions by expanding the money supply, resulting in increased prices across various sectors. Low-interest rates have fueled asset demand, potentially leading to asset bubbles. Interestingly, the Fed is currently in the process of reducing the money supply, which may have the opposite effect of further increasing the money supply. This shift could lead to higher unemployment, increased default rates, and decreased U.S. exports.
To learn more about our proactive Risk Management approach in addition to Investment Planning, see Proactive Risk Planning.
Our Strategy
In light of these economic dynamics, we maintain a significant holding in U.S. dollars, a strategic choice that safeguards against both high inflation and the escalating risk of economic recession.
If you're curious about how we're adjusting our portfolios to help clients achieve their financial goals, please watch our informative video.
We offer complimentary portfolio reviews, during which we analyze key risks and potential economic impacts, comparing them to current economic data. If you're interested, don't hesitate to schedule a review of your existing investments.
Effective investment planning remains paramount as we navigate through the complex economic terrain of 2023. By staying informed and adapting to the evolving landscape, you can make informed decisions that align with your financial objectives.