Andrew Opdyke, an economist for First Trust, was back on our most recent podcast. For those who don’t know, Andrew comes on our show about once a quarter to update us and our community on recent economic events.
This time, he provides us with a great mid-year economic update that will help you when retirement planning.
We’re going to:
- Summarize the first two quarters of the year
- Summarize what Andrew expects over the final two quarters of the year
If you want to listen to the podcast, you can find it right on our site here. Otherwise, we’ll cover the most important parts for you below.
What Happened in the Last Quarter and What are Andrew’s Thoughts?
We’re a little more than halfway through the year, and the first half of the year was more comfortable than the last quarter of 2022. Even the markets have been far less volatile, which is a good thing for investors.
At the end of the first quarter of the year, we saw the Silicon Valley Bank collapse and a few domino pieces fell along the way.
Today, the Fed agrees that they have more work to do. We’re at the halfway mark of the year, and we’re seeing:
- Inflation trend lower at 3% year-over-year, although Andrew believes this to be a little misleading
- Energy prices are slowing down a bit
- Taking out food and energy, we’re seeing inflation fall from 5.9% to 5%, which is hitting consumers quite a bit
Inflation has remained stubbornly sticky, and the Fed is expected to raise rates at the end of July and maybe another before the end of 2023. The question remains:
- Will we see a recession?
- Will employers begin laying people off?
We’re seeing manufacturing come down a bit, but construction activity is at record-high levels. Employment, at the time of this article, is still progressing and remains strong. Consumers are still spending.
Has everything transpired as expected?
For the most part, the economy is doing well and even the markets are stabilizing. There was sort of a concentrated performance in the tech industry at the beginning of the year.
Andrew believes that the market may get a little bumpier going into the end of the year.
Rates Hikes or Cuts: What Will We See?
Rate hikes and cuts are always top news stories and something we hear a lot about from our clients. Andrew believes that at the end of July, the Fed is likely to raise rates again. He expects an additional rate hike before the end of the year.
At the mid-point of August, he expects that the CPI will dictate the future choices from the Fed.
CPI was from activity almost a year ago. We’ll see some bumps in the newest CPI due to the Ukraine/Russian war.
The Fed has changed pace often this year because the ability to guide and navigate this ever-changing environment is evolving. What the Fed doesn’t want to do is repeat the mistakes made in the 70s and stop inflationary measures too fast.
Andrew anticipates the rates will have one or two hikes before the end of 2023 and sometime in 2024, rate hikes may follow. As inflation begins to trickle in the right direction, the Fed will begin to lower rates.
Most countries are seeing similar trends as the United States, but we are seeing:
- Germany has rising inflation
- United Kingdom’s inflation remains flat
Energy price rises in the US can put some pressure on the UK economy. At this time, we’re not seeing a Central Bank that we can say, “Hey, they’re doing everything right.” Every Central Bank is working through these ups and downs.
Recession Risk at the Mid-point of 2023
Recession is something we’ve been talking about for a while now, and with everyone spending like normal, it’s almost a self-fulfilling prophecy at this point. Andrew estimates that there is an 80% chance that we’ll see a recession.
When will this recession happen?
No one knows. We may see a recession in 2023 or 2024. We’re seeing facilities being built today without orders in the pipeline in the coming year. What does this mean? Businesses are sort of holding back a recession, but something needs to happen before orders run out for the momentum to remain.
Reading through banking reports, it looks like consumer savings may fall back to pre-COVID levels by the end of 2023. Less money in the bank may lead to consumers spending less, which also raises the risk of a recession.
If we hit a point where consumer spending falls and rates are high, it will likely push us into a recession.
Can we avoid a recession? Possibly. However, it’s a very delicate time. We’re even seeing the markets perform very well this year.
2023 Mid-year Economic Update: Stock Markets
No one would have guessed that going into 2023, the market would be where it is today. Technology and AI helped lift the market at the start of the year, but Andrew is seeing the market broaden a bit.
We’re seeing 3% – 4% of market growth happening from outside of the tech sector.
Most people started the year with expectations that the market would go down, but it hasn’t really happened. Instead, we’re seeing people paying not based on earnings but higher multiples from these companies. We’re seeing the top 10 tech companies trading at 30 times their earnings. The top 11 – 50 companies are trading at 16 – 18 times their earnings.
A sustainable bull market will require some of these non-tech companies to have strong earnings and returns.
Based on GDP and employee output, we’re not seeing the rise in productivity that tech companies expected with AI. Many of these technologies take time to evolve and be adopted by users, which could cause some of these tech stocks to come back down.
China reports not seeing the bounce back that they expected of 5% growth, which is low for the country. Apple and Tesla moving to India is changing the economic landscape. With the country likely to have the world’s largest population soon, it’s very likely that India will begin to grow rapidly.
Top-down leadership works well in short bursts, but communist countries have been, traditionally, difficult to maintain long-term.
For example, the tech sector has been the backbone of the US for the past 20 years, but China has had a lot of difficulties in this arena. China is known to replicate ideas and innovations, which means they continued to fall behind on tech that others had already released.
Finally, when companies in China started to innovate, the communist government started to put the clamps on them because it didn’t look good for the government when these companies were acting independently.
We saw this with tech investments and Alibaba. Investors have been scared away from China due to this clamping down.
We’re also unsure of where China’s economy stands because the country has been known to provide inaccurate information. Andrew expects that over the next 10 – 30 years, China will struggle to grow.
Geopolitically, the world may look very different in the next 5 – 10 years.
Forward-looking Questions: Concerns for the Second Half of 2023
As we move into the end of the year, there are some major concerns, especially with a lot of the big company’s price-to-earnings (P/E) ratios. If confidence wanes, we can see some pullback while P/E goes back to normal levels.
Commercial and office real estate loans are coming up.
We are seeing a lot of foreclosure talks that can hit local and regional banks. Large banks are less susceptible to these potential risks of foreclosure.
Russia and Ukraine will remain a major question mark. China’s threat to Taiwan will remain critical to the market, especially if things intensify, such as an increase in training in the area.
Andrew believes the biggest headwinds are:
- P/E for many companies is too high
- Money is coming out of the system
In 2020/2021, we saw the government inject a lot of money into the system. PPP loans, COVID checks, treasuries trying to hold money – all of this can have an impact on the economy and cause growth to slow heading into December.
Forward-looking Questions: Positives for the Second Half of 2023
Manufacturing investment will help the country, especially bringing back semiconductor manufacturing. Investments like this will roll out for years to come and will boost the economy.
We’re seeing a lot of things today that can help us see a boom in the future.
Andrew is optimistic that we’re a lot closer today to a recovery than just a few months ago. It’s very unlikely that we’ll need massive rate hikes of 500 – 550 basis points again. We just need to get over the last hurdle, and then we can see growth.
Improvements in education, clean water, manufacturing and so on will drive us forward 18 months from now.
Once we get through the tough stuff, we’ll have a very bright future.
S&P 500 Forecast
Andrew thinks that we’re likely to see a pullback in the market because the markets got ahead of themselves. Evaluations and P/E are too high, but this can change with some major unforeseen growth factors, such as AI reaching its expected potential much faster than expected.
People will need to reevaluate to see if they’re overpaying for something that is underperforming with the tech stocks that are trading well after what they should be, in many cases.
Do you want to talk to us about any of these key points in the mid-year economic update?
Schedule a 15-minute consultation with us today.