George Mateyo is the Chief Investment Officer at Key Private Bank.
Despite overall uncertainty and fluctuating market conditions throughout this year, industry experts and analysts agree: The U.S. economy is performing better than expected in 2023. As we look ahead to year-end and beyond, investors may be curious about what “tricks” or “treats” the economy has left in store before we turn the page to 2024.
The Treats: Overall Strength In Numbers
This time last year, it seems all anyone could talk about was how dismal the U.S. economic outlook was for 2023, with at least one model forecasting a 100% chance of economic downturn and another economist predicting a “severe, long and ugly” recession.
Fast forward a few months, and you’ll see the Nasdaq Composite’s first-half performance was its best in 40 years. And in the first six months of 2023, the S&P 500 saw its best start to a year since 2021.
Of course, the stock market is not the economy—but it is an indicator of where investors think the economy may be heading. In our view, this year’s strong market performance has been complemented by a surprising amount of economic resilience: In recent weeks, a model maintained by the Federal Reserve Bank of Atlanta estimates the economy grew at a whopping 4.9% annualized rate in the just-ended third quarter, unemployment remains low and consumer spending is strong.
A solid Q2 earnings season also bolstered optimism among investors. Almost 80% of S&P 500 companies saw higher profits than analysts had forecast.
The Tricks: Lingering Fears And Global Pressures
While economic conditions have been more favorable than many anticipated a year ago, underlying and ongoing risks could cast a shadow over the remaining months of 2023, potentially spelling volatility before we turn the page to 2024.
High inflation and interest rates remain a top concern for policymakers, investors and households alike. While the Federal Reserve announced a pause in rate hikes at its September meeting, Federal Reserve Chair Jerome Powell noted in a speech at the annual Jackson Hole Economic Symposium that the U.S. economy’s persistent strength could necessitate more rate increases to fight inflation.
The slowing of the Fed’s aggressive tightening cycle may be welcome news for many, but it is worth noting the core personal consumption expenditures price index inflation reading for August was 3.9%—almost double the Fed’s long-term inflation target of 2%.
Lingering recession fears and differing expectations on Wall Street and Main Street are also contributing to a complicated economic picture. A recent National Association for Business Economics survey found that 45% of business economists expect the next recession will not occur until the second half of 2024 or later. However, as of late September, 64% of U.S. consumers feel as though the country is currently in an economic recession.
In addition to domestic pressures, geopolitical conflict and global trade loom large over the world economy. China’s annual economic growth rate slowed to 2% in 2022—the lowest since 1976—prompting warnings from economists who say China’s slowdown could result in tighter global financial conditions.
Russia’s ongoing war against Ukraine also threatens global supply chains. Russia provides roughly 10% of the world’s oil output, and while oil prices have stabilized since the onset of the war, they remain subject to volatility in the near term. In fact, consumers are once again beginning to feel this pain at the pump, with higher gasoline prices accounting for over half of August’s bump in U.S. goods and services prices from the month before.
What This Means For Your Investments
Looking to year-end and beyond, investors are weighing a maelstrom of economic conditions, forecasts and trends. In these times of uncertainty, it is especially important to maintain a long view of your investments and avoid making short-sighted decisions in response to momentary turbulence. In particular, I encourage investors to consider the following:
• Be neutral to risk. Given the ongoing and swift crosscurrents, I believe being risk-neutral is an appropriate strategy.
• Look out for opportunities and dislocations. September and October have historically been among the most volatile months of the year. I would, therefore, keep a shopping list ready should market volatility reemerge.
• Implement or update a well-diversified investment plan—and stick to it. This should be your guiding principle and help ensure long-term success amid shorter-term volatility.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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