Mid-Year Market Outlook
From interest rates and inflation to the job market and recession, we anticipate there will be a number of shifting elements in the economy for the remainder of the year and potentially into 2024. At the May meeting this year, the Fed increased its policy rate for the tenth consecutive time, pushing the upper bound of the fed funds rate to 5.25%, the highest since August 2007. The Fed’s aggressive rate-hiking campaign has been a focus for investors for over a year. Frankly, investors are probably ready to move on from the Fed being the centerpiece of most conversations.
We expect the Fed to change strategy during the latter half of 2023 for at least two reasons. First, the Fed should have less pressure to react to a tight labor market as the job market is set to cool throughout the remainder of the year. And second, the Fed will likely be less concerned inflation could get out of control from sticky- services inflation since we expect service prices to ease. One nagging inflation component that will ease in the coming months is rent, as a record number of new apartment units under construction will dampen rent prices. Expect investment opportunities in firms related to multi-family and mixed use projects.
Investors will likely shift focus from central bankers to consumers. We expect less focus on tightening monetary policy and more on recession risk. The baseline forecast is the domestic economy slides into recession. However, solid growth in the first quarter and a potential recovery in the last few months of the year put annual U.S. growth close to a 1% forecast, outpacing the Eurozone. If job growth cools and the unemployment rate rises, consumers will likely experience declining disposable income, which could be the impetus for a recession as consumers pull back on spending. In the near term, consumers are still unleashing pent-up demand for services, especially within the leisure and hospitality sectors. But when the spending splurge ends, investors should expect some weakness in the consumer discretionary space.
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