January 30, 2023
Gary Schlossberg, Global Strategist
Jennifer Timmerman, Investment Strategy Analyst
Chris Haverland, CFA, Global Equity Strategist
Peter Wilson, Global Fixed Income Strategist
John LaForge, Head of Real Asset Strategy
Mason Mendez, Investment Strategy Analyst
Mark Steffen, CFA, CAIA, Global Alternative Investment Strategist
Spotlight: Labor takes center stage in this year’s economic outlook
- A tight labor market is a double-edged sword for this year’s economic outlook, supporting household income growth and spending, but contributing to high inflation and credit tightening by the Federal Reserve.
- Wage pressure in a tight labor market favors those firms whose margins are insulated by productivity growth or by pricing power bolstered by strong productivity gains, a high intellectual property content, or through imposing barriers to entry and economies of scale.
Equities: Fourth-quarter earnings contraction?
- After growing by nearly 5% in the third quarter of 2022, Bloomberg consensus expects S&P 500 Index earnings to have declined in the fourth quarter of 2022.
- In this weakening earnings environment, we suggest focusing on high-quality companies with consistent earnings growth, low debt levels, and high return on equity.
Fixed Income: Will March see the last rate rise from the Fed?
- The U.S. inflation rate has been falling back rapidly, but at 6.5% in December it still stands a full two percentage points above the top of the Federal Reserve’s (Fed’s) current target range of 4.25% - 4.50%.
- History may suggest that the federal funds rate should exceed inflation before the Fed will pause. It remains uncertain whether March will mark the last rate increase, as the market expects.
Real Assets: What is Urals crude oil, and who’s buying?
- There are over 150 different blends of crude oil, one of which is Russia’s export grade crude oil, called Urals.
- Despite sanctions on Russia, countries such as China, India, and Turkey continue to purchase Russian crude oil.
Alternatives: Private equity activity decelerates
- Private equity deal activity and exit volumes slowed significantly in 2022 versus the prior year, as the industry adjusts to declining valuations amid rising economic and geopolitical uncertainty.
- Given our longer-term cyclical outlook, we remain constructive on private markets in general and believe investors will be well-served to consider long-term allocations to Small/Mid Cap Buyout and Growth Equity strategies.