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Halfway through 2023, we are surprised by how resilient the U.S. economy is. We are more surprised by how robust the U.S. equity markets are. However, as we continue to “take nothing on its looks and take everything on evidence,” we find that, except for the labor market, broader economic trends warrant caution. Further, the YTD surge in the S&P 500 remains driven by seven Large-Cap Technology stocks. We remain steadfast in our recession expectation for later this year and believe equity valuations will encounter headwinds. Fixed-income investments remain exposed to manic economic releases and a Federal Reserve determined to eliminate inflation threats at any cost. Our 2023 Half-Time Update evaluates our “expectations” from our 2023 Outlook and frames our thoughts moving forward. Read more about our views herein.
We can’t remember a time over the last 20 to 30 years when the consensus expectation for capital markets and global economies have been so synchronized. In our 2023 Outlook, we try to avoid the herd mentality of the great consensus expectation unless we can find evidence to support it. In doing so, we unpack our views on the economy, inflation, and recession. Finally, we provide our expectations for capital market returns in 2023. Read more about our views herein.
While COVID continues to disrupt a classic economic life cycle, we still believe the U.S. economy remains below peak levels and is somewhere just shy of halfway to its peak. However, the exact location on the economic life-cycle curve is unknown given both the idiosyncratic nature of a global pandemic and the unprecedented fiscal and monetary response from international central bankers. Read more about our views herein.
2021 started on relatively solid footing following the tumult offered up in 2020. During the first quarter of 2021, the S&P 500 increased by 6.2%, while the NASDAQ and Dow registered gains of 3.0% and 8.3%, respectively. Most bond indices were down through the first 90 days of 2021, led lower by longer-duration government bonds, as the 10Yr U.S. Treasury (10Yr TSY) backed-up1 by over 80bps (0.8%) to 1.74%. Over the past 18 months, U.S. policymakers took unparalleled actions to resuscitate a faltering global economy through slashing interest rates and unprecedented quantitative easing. However, we believe the Federal Reserve Open Market Committee (FOMC) has unintentionally painted itself into a corner. Read more about our views herein.
Our 2021 Outlook, entitled “Hope Over Despair,” outlined our prologue for a post-COVID world. And thus far through 2021, our optimistic stance has triumphed over our doubts and fears. While quite a few of our prognostications are coming to fruition, we were surprised about how several economic and capital market trends evolved. In hindsight, the unprecedented circumstances surrounding a global pandemic changed our present and future in unexpected ways. Read more about our views herein.
2020 will be remembered as a seminal year that challenged humanity's compassion, ingenuity, resolve, and tolerance. However, with all the despair and divisiveness, hope was provided through several highly effective vaccination prospects and therapeutics. Despite all the carnage caused by COVID 19 during 2020, the S&P provided investors with a total return of over 18%. However, unlike 2019, which we coined as the year of the "everything rally," capital market performance was more discerning. COVID 19 and the ensuing global recession ended the 129th consecutive month of economic expansion here in the U.S. and the 132nd month of an equity bull market. But we believe we are on the precipice of a new cycle, supported by pent-up consumer demand, positive vaccination/therapeutic trends, additional COVID and government stimulus (including potential for local and municipal funding), and unprecedented central bank/FOMC support. Read more about our views herein.
2019 was the year of the “everything rally.” Investors’ fear of missing out (FOMO) combined with there is no other alternative (TINA) has helped offset the 4Q18 sell-off. The geopolitical outlook remains uncertain and poses a significant risk to any economic and capital market outlook going forward. While the current capital market and economic cycle seem extended from a historical perspective, most sell-side analysts, strategists, and portfolio managers believe there is still room for markets to run. However, we see economic cracks forming, and fear the unintended consequences for capital markets associated with near-zero global short rates. Read more about our views herein.