On February 16, we hosted a webinar with special guest, Gargi Pal Chaudhuri, who is BlackRock’s Head of iShares Investment Strategy for the Americas. BlackRock is the largest asset manager on the planet, managing over $8 trillion. FJP Wealth Manager, Scott Manley, and Gargi discussed important topics about the economy and the outlook for 2023. This article will recap the important points from the webinar.
In this blog, you’ll learn:
- Market Recap of 2022
- Inflation – Will it continue to fall?
- U.S. Federal Reserve – Will it continue to raise interest rates?
- U.S. Unemployment Rate – Will this remain low?
- Housing – How are higher interest rates impacting housing?
- Recession – Will there be a recession this year?
- Bear Market Rallies – Are we in another bear market rally?
Market Recap of 2022
Our discussion with Gargi began with a recap of the U.S. stock and bond markets in 2022.
If last year seemed like a difficult year in the market, it’s because it was. It was the worst year for U.S. Bonds since 1926, and the 7th worst year for stocks. There are some years where stocks do poorly, but bonds have a positive return and can offset some of the losses in stocks - that was not the case in 2022.
With stocks and bonds both negative in 2022, money markets were one of the few investments that did not lose money. For our clients, we sold all the bond funds early in 2022 and therefore were able to avoid most of the losses in bonds. When thinking about stock returns last year, some analysts have used the acronym, TINA, for “there is no alternative”. Increases in interest rates over the past year have resulted in higher dividend yields in bond funds.
Gargi told us her acronym for 2023 is BARB, “bonds are back”. So, as we move from 2022 to 2023, we have moved from TINA to BARB.😊 With bonds now at lower prices and paying higher dividends, we have started buying bonds back for clients.
Inflation – Will it continue to fall?
On February 14, 2023, the Bureau of Labor Statistics announced the Consumer Price Index (CPI) for January 2023. The “All Items” inflation number reached a peak in June 2022 and has been falling since.
Source: Bureau of Labor Statistics
While CPI is the inflation rate for the consumer, the Produce Price Index (PPI) is the inflation rate for businesses and producers. On Thursday, February 16, the Bureau of Labor statistics announced that the monthly number in January was 0.7%, which was more than the 0.4% that was expected. This high-level renewed concerns for investors that inflation may not come down as quickly as expected and the U.S. Federal Reserve may need to keep interest rates higher for a longer period.
U.S. Federal Reserve – Will it continue to raise interest rates?
On February 1, 2023, Federal Reserve Chairman, Jerome Powell, announced at his press conference that the Fed Funds Rate would be raised by 0.25% to 4.50%, which was expected by analysts.
Source: U.S. Federal Reserve
Chairman Powell again stated that the Federal Reserve expects to continue raising rates and keep them higher through the rest of 2023.
Analysts have been predicting another 0.25% rate hike at the Fed meeting on March 22 and another 0.25% at the Fed meeting on May 3. With the higher-than-expected PPI number for January, some analysts are now predicting a third 0.25% increase at the Fed meeting on June 14. If these three rate increases are implemented, it would put the Fed Funds rate at 5.25% by June.
U.S. Unemployment Rate – Will this remain low?
The unemployment rate has remained low for the past year, even with rising interest rates and large layoffs by the big tech companies.
Source: Federal Reserve of St. Louis
So far, most people that have been laid off have been able to find new jobs relatively quickly, and the overall unemployment rate has remained low. As the Federal Reserve continues to raise interest rates in 2023, a big question is whether the economy will slow enough to cause the unemployment rate to rise.
Housing – How are higher interest rates impacting housing?
Home prices have been falling over the past year in Santa Clara County, California (where many of our clients live) as well as across the US.
Santa Clara County Median Home Price
U.S. Median Home Price
Rising interest rates by the Federal Reserve have increased the interest rate on 30-year mortgages above 6%, and this has contributed to falling home prices. Yet, even with this decrease in home values, they are only back to where they were about a year ago.
Recession – Will there be a recession this year?
A yield curve is calculated when the interest rate of 2-year treasuries is subtracted from the interest rate of the 10-year treasuries, and can be tracked over time.
When this yield curve becomes inverted (number is negative because the interest on the 10-year treasury is less than the 2-year), it has been a warning sign of a recession coming over the next 6 months. Recessions are shown in gray in the graph below. This is the most the yield curve has been inverted in over 40 years.
Source: Hidden Levers
Gargi and her team at BlackRock have created a “Recession Monitor” that she thinks is a better indication of a pending recession.
Four of the five measures above are at the level of concern that a recession may be coming (boxes in red). Gargi’s view is that there is some risk of a recession in the U.S. this year, but she expects it to be a mild downturn.
Bear Market Rallies
The bear market of the past year has had many rallies, only to break down to new lows.
Source: Hidden Levers
The start of the U.S. stock market in early 2023 has been stronger than many analysts predicted. The U.S. stock market has started to trend down over the past few weeks, and it has investors wondering if we have just finished another bear market rally that will again turn down and reach new lows, or is it the start of a sustained upward rally that still has more room to continue rising.
Gargi told us that we might see some additional weakness in the months ahead, but she did not expect the market to go all the way down to the lows of last October. We would expect the strength or weakness of the U.S. economy to likely have an impact on the performance of the stock market for the remainder of the year.
Where Do We Go From Here?
We finished the webinar with some questions from the audience. There were questions for Gargi on what she thinks are the largest geopolitical risks in 2023 and indicated that the war in Ukraine and tensions with China were at the top of her list.
We talked with Gargi about her outlook for the U.S. stock market in 2023. She said she expects a positive year in the U.S. stock market ahead of us and we like her optimism and hope she is right.
If you have questions on how the topics in this article could impact your portfolio, give your Wealth Manager a call.
Financial Journey Partners - Partners in Your Financial Journey®
Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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This is being provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Some views expressed are those of BlackRock and do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates. Investment advisory services are offered through Mutual Advisors, LLC DBA Financial Journey Partners, a SEC registered investment adviser.
1 US Department of Labor – Consumer Price Index
3 Wall Street Journal – Economists Now Expect a Recession, Job Losses by Next Year
5 BlackRock – 2023 Global Outlook
6 Vanguard – Market perspectives: December 2022