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The MTC Investment Team presents the 2023 Market outlook:

  1. The Great Reset – Jason Ritzenthaler, CFA, CTFA
  2. Fixed Income Update – Kate Braddock, CFA
  3. Equity Market Outlook – Jonnathan De Jesus CFA, CIPM
  4. Economic Outlook – Chris Morgan, CFA, CFP®, CAP
  5. Earnings Update – Katie Cihal, CFA, CPA
  6. Geo-Political Update – Sharon Giuffre, CFA, CAP

Economic Outlook – Chris Morgan, CFA, CFP®, CAP

2022 has been a year of economic resilience in the US, with annualized real GDP growth (a measure of economic activity) registering at -1.6% for the first quarter of 2022, -0.6% for the second quarter of 2022 and +3.2% for the third quarter of 2022, based on estimates from the US Bureau of Economic Analysis1. Furthermore, the Atlanta Fed’s GDPNow indicator is currently predicting +3.8% annualized real GDP growth for the fourth quarter of 20222. For 2023, our investment team forecasts GDP growth of +1.2%.

US nonfarm payroll employment has continued to be supportive of economic growth, with the addition of 269,000 jobs in September 2022, 284,000 jobs in October 2022 and 263,000 jobs in November 2022, according to the latest estimates from the US Bureau of Labor Statistics3. We believe the relatively low and stable level of new Covid cases has contributed to the job growth, with US daily new Covid cases averaging approximately 50,000, compared to the nearly 1,000,000 new cases reported daily in early January 20224. Our investment team forecasts that the unemployment rate will rise modestly from 3.7% in November 2022 to 4.4% in December 20233.

We expect that this modest rise in the unemployment rate, from unusually low levels up to more normal levels, could serve to better balance supply and demand in the labor market, which could help to reduce the inflation rate in the US. Indeed, our investment team forecasts that the rate of US inflation, based on the Consumer Price Index, will slow from 7.1% year-over-year in November 2022 to 3.5% in 20233.

Some of the concerns that were top of mind for investors at the beginning of 2022 included a possible reimposition of broad stay-at-home orders in the US in response to the surging Covid cases, as well as potential tax increases; for the most part, neither of these concerns materialized.

Now, the primary concerns for investors seem to center around the risk of the US Federal Reserve’s (“Fed’s”) rate hikes potentially pushing the US economy into recession, or economic decline, in 2023. However, we forecast that the Fed’s federal funds effective rate will finish 2023 at approximately the same level that it is currently. We expect that this will help support the positive 2023 GDP growth forecast of +1.2% cited previously.

Consumer sentiment is also supportive of positive US GDP growth in 2023, in our view. Prior recessions have tended to occur after a prolonged economic expansion led to euphoric sentiment. However, the University of Michigan’s Index of Consumer Sentiment declined from 70.6 in December 2021 to 59.7 in December 20225. It seems clear to us that sentiment remains anything but euphoric, which should enable the economic expansion to continue in 2023.

While we forecast that slower, although still positive, GDP growth will come to fruition in 2023 in the US, the International Monetary Fund forecasts that emerging market and developing economies will sustain 2022’s growth rate of 3.7% in 20236. We believe China’s easing of its Covid-related restrictions is a key reason for why GDP growth in emerging markets may sustain a more robust pace, and this reason is supportive of our investment team’s forecast for emerging market equities to generate a total return of +10.0% in 2023 (as measured by the MSCI Emerging Markets Index) vs 8.8% for US equities (as measured by the S&P 500 Index). While we continue to avoid any material exposure to emerging market equities in our least risky primary Investment Strategy (our Income ETF Strategy), we believe clients in our other primary Investment Strategies will benefit from being global investors, including having some exposure to emerging market equities.

External sources: BEA1, Federal Reserve Bank of Atlanta2, BLS3, 4 Worldometer, 5 University of Michigan, 6 IMF

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