Posted by lplresearch
Tuesday, July 11, 2023
Recently, the LPL Research team published the 2023 Midyear Outlook: The Path Toward Stability. A six-month check-in on where the markets have been and where they seem to be headed, the report is a great guide to help steer personal portfolios. If you haven’t read it yet in its entirety, take a minute to tap into some of the key takeaways.
We expect the Federal Reserve (Fed) to not only end its rate-hiking campaign toward the end of 2023 as inflation abates, but also introduce the possibility of a rate decrease. A cut in rates, and a recession could happen should consumer demand and job growth cool, and unemployment rise—as all three are expected to do. As inflation convincingly cools, markets will likely respond favorably to the Fed lowering rates. So far, an improving Chinese economy hasn’t materially impacted global inflation.
Progress was made as inflation fell and interest rates stabilized. However, macroeconomic risks are top of mind as the thought of recession looms. Earnings are likely to decline this year, but solid revenue growth and stable profit margins may help limit the magnitude of any decline. Against this backdrop, LPL Research sees modest second-half gains for stocks, though with the potential for elevated volatility, until there’s more clarity on how long and deep a potential recession may be.
After the most aggressive rate-hiking campaign in decades, interest rates are at highs last seen in the early 2000s. The risk here is that these rates won’t last, and once bonds mature, investors could be looking at reinvesting proceeds at lower rates. Investors may be better served to lock in today’s higher bond yields for longer using some of their excess cash holdings. Historically, core bonds, as proxied by the Bloomberg Aggregate Bond Index, have performed well during rate-hike pauses. While the definitive arrival of that pause is still up for debate, we expect to see it in the coming months.
The global dynamic has shifted as 2023 progresses. Chinese President Xi Jinping tried to broker a settlement to end the Russia-Ukraine conflict. Though unsuccessful, the framework for the settlement underscores China’s determination to establish a global leadership position, as it seeks to broaden its trade and political relationships and undermine the economic power the U.S. commands. U.S. and China relations have become increasingly fraught with concerns that China has intensified its efforts to secure technology that enhances its military buildup. As a result, the White House has embarked on policy reinforcing the need for resilient supply chains, which could help support the industrials sector.
With China reopening post COVID-19, analysts feared global inflation would ensue as a result of increased demand for industrial metals. The good news is that global inflation has not panned out so far. And even though China’s reopening was delayed due to a COVID-19 outbreak, the economy is projected to gain momentum through year-end — which should increase demand for a range of commodities. Meanwhile, interest in (and pricing for) precious metals has been up — specifically gold. Central banks are the primary buyer as some have looked to move away from the U.S. dollar.
The U.S. dollar has been trending steadily lower since reaching 20-year highs last September, as the key factors that support a strengthening dollar have dissipated. With markets pricing in lower interest rates later this year, the dollar’s interest-rate advantage has eroded, making it a relatively less attractive option for global capital. Global usage of the dollar is more than stable — nearly 90% of global foreign currency transactions involve the greenback. Although there have been some musings on the dollar’s downfall, we feel those reports are exaggerated.
Overall, we’re constructive on alternative investments, which can offer portfolio diversification and improve risk-adjusted returns. But given the economic backdrop of the last six months globally and at home, there may be a wider range of performance among fund managers based on things like their strategy focus, trading style or geographic exposure. As a result, understanding the opportunities, risks, and overall strategy of any given alternative investment is more important than ever.
Again, these are some of the high-level insights from the report. For in-depth analysis and detail, read the full Midyear Outlook: The Path Toward Stability today.
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