Our 2023 investing outlook started with a theme of returning to normalcy. Considering 2022’s market volatility and the aftereffects of the pandemic, the idea of finding balance was certainly a welcomed change. It’s a theme we could all embrace six months ago and what we will continue to rally around through year-end. That’s not to say that 2023 hasn’t come with its own set of challenges. We saw two regional banks fail in rapid-fire succession in March—and another closed its doors in May. Collectively representing over $530 billion in assets, the trio ranks as the second, third, and fourth largest bank failures to date. We also held our breath as a last-minute deal to raise the debt limit came together as the clock ticked closer to default. Despite the market gyrations these events caused and a banking sector still on tenterhooks, the overall financial system seems stable. Counterbalancing the challenges, some bright spots include:
- Inflation is under 5% at home, significantly lower than its 8.3% level this time
- The fed funds rate is approaching its apex as the Federal Reserve grapples with
the unknown impacts yet to emerge from its aggressive tightening cycle
- Global inflation has ticked down from its 8.7% high in 2022, and is following a
slow descent to a projected 6.5% for 2023
By and large, these are things we know, definitively or directionally, a guiding force that shapes our perspective on the next six months or so. Like anything, they come with some potential opportunities for investors—opportunities that may present themselves in international equities, core bonds (particularly if the Fed is indeed done raising
rates), and industrials to name a few.
On the flip side, there are uncertainties out there. The possibility of a recession is probably the biggest unknown, with some of the biggest questions around when it might hit, how long it might last, and how significant it could be. That said, any recession that occurs would appear to be more in the mild range at this point.
Perhaps recession is the largest unknown, but we should also factor in the possibility for interest-rate volatility. For example, rates could move higher if inflation remains stubbornly high. Or, they could see a fairly sizable move lower in the event of a recession. Ultimately, how rate volatility resolves itself will be a big driver for markets.
Clearly the LPL Research team doesn’t have a crystal ball. But there are two things we know. The insights in this report will help position investors, along with guidance from their financial professional, to achieve their goals. Second, our seasoned team of experts will be by your side, providing guidance and actionable insights as the second half unfolds. And for these two things, a crystal ball is not needed.