In our 2023 Outlook published in January, we shared a cloudier than normal outlook. We expected economic growth to continue—but grind lower—and the pace of inflation to decline but remain higher than desired. We also noted the silver lining to a cloudy near-term outlook: that the long-term outlook for portfolio returns had improved considerably due to lower valuations for stocks and higher starting interest rates for bonds.
As we pass the halfway point of 2023 the soft-landing (no recession) vs. hard-landing (recession) debate continues. However, we can say that economic growth has been more resilient than expected. A more detailed market recap follows, but suffice it to say that:
- Better than feared economic data has supported stock prices;
- A decline in inflation has allowed interest rates to stabilize, leading to solid returns in the bond market as well.
Through the end of June, bonds are up about 2%—in line with their income payout— and most parts of the stock market are 5-10%. A handful of large technology related companies have driven the S&P 500 higher by 17% and growth indices higher by nearly 30%.
While the long-term outlook for stock and bond returns remains good (in the 6-8% and 4-5% range respectively), the outlook for the next 6-12 months remains uncertain. We expect inflation to continue to recede and economic growth to be slower than the first half with recession a likely outcome.
In the year to date, the economy has been able to absorb higher interest rates reducing the odds of a severe recession. However, a significant upside surprise to growth appears unlikely given numerous headwinds. As a result, we are seeking opportunities to position portfolios in a manner that we expect will hold up better in a recessionary scenario.
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