April 19, 2023
Investors today face no shortage of challenges, with the signs increasingly suggesting a late-cycle environment. To help navigate these uncertainties, we’ve put together a collection of actionable ideas on how to proactively respond to the market’s most pressing issues.
Avoiding a recession looks increasingly difficult
According to the Wall Street Journal’s January survey, 61% of economists believe the United States will be in a recession sometime in the next 12 months. That’s up from just 18% of survey respondents in January 2022. One reason for the mounting pessimism? The Composite Index of Leading Indicators—which has turned negative before each of the last eight recessions—is squarely in negative territory and currently is getting worse.
Leading Economic Indicators have been steadily deteriorating
YoY change in the Leading Economic Indicators (%)
Source: The Conference Board, as of March 31, 2023. The Composite Index of Leading Indicators (LEI) is published monthly by The Conference Board and tracks 10 economic components whose changes tend to precede changes in the overall economy. It is not possible to invest directly in an index. YoY refers to year over year. Past performance does not guarantee future results.
The earnings outlook for U.S. companies continues to decline
After two years of steady earnings growth, U.S. companies have begun to feel the effects of today’s macro headwinds. Wall Street’s expectations for earnings have been steadily softening since early 2022, and stock prices have generally followed suit, albeit with heightened volatility during that time.
Stock prices and earnings estimates tend to move together over time
Source: FactSet, as of March 31, 2023. The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. It is not possible to invest directly in an index. Earnings per share (EPS) is a measure of how much profit a company has generated calculated by dividing the company’s net income by its total number of outstanding shares. Past performance does not guarantee future results.
Persistently high inflation remains a major headwind
In the summer of 2022, inflation in the United States, Canada, and much of Europe hit a 40-year high. Although it’s come down since then, it remains a meaningful challenge. In addition to the pain that a high rate of inflation inflicts on consumers, it also dilutes the real (i.e., net) returns for the vast majority of investments—essentially anything that doesn’t automatically compensate for rising inflationary pressures.
Source: U.S. Bureau of Labor Statistics, as of March 14, 2023. The Consumer Price Index (CPI) tracks the average change of prices over time by urban consumers for a market basket of goods and services. The figures above represent the year-over-year changes in the CPI as of February 28, 2023.
Interest rates have risen dramatically over the past year
In March 2022, the U.S. Federal Reserve kicked off the current tightening cycle, hiking the federal funds rate 25 basis points from its near-zero rate in an attempt to tamp down inflation. Since then, interest rates across the board have risen dramatically, which has been a challenge for virtually every segment of the bond market. What’s more, the yield curve is now significantly inverted, with yields on short-term debt higher than those of longer-term offerings. An inverted yield curve has historically been a harbinger of a pending recession.
Yields are significantly higher—and the curve is now inverted
Source: U.S. Department of the Treasury, as of March 31, 2023.
The jobs market, however, remains remarkably resilient
Despite the myriad challenges in the economy of late, the jobs market clearly hasn’t been one of them. Unemployment has trended consistently lower after spiking in 2020—and in January 2023, it hit a 53-year low. It’s a data point that’s worth watching closely: It’s hard to imagine the United States experiencing a recession with such a healthy jobs picture—and it’s also hard to imagine employment levels would be unaffected should the economy materially deteriorate from here.
The unemployment rate has been a consistent bright spot
Source: U.S. Bureau of Labor Statistics, as of March 31, 2023.
What to do now
There’s no shortages of challenges in today’s markets, but that doesn’t mean you need to sit on the sidelines. Below we highlight three investment themes worth considering and some strategies you can use to incorporate them into a diversified portfolio.
Disciplined Value Fund Disciplined Value Mid Cap Fund International Growth Fund Mid Cap Growth Fund Multifactor Mid Cap ETF
Focus on the quality factor
With mounting uncertainty in the stock market, consider rotating into offerings that focus on quality in those segments that may be experiencing heightened volatility. Why quality? History's shown that companies with more durable earnings are better equipped to weather an economic downturn.
Bond Fund Investment Grade Bond Fund Municipal Opportunities Fund
Consider high-quality and tax-exempt bonds
Pivoting to emphasize high-quality fixed-income positions during this phase may prove prudent. We believe mortgage-backed securities, investment-grade corporates, and diversified tax-exempt offerings are particularly attractive in today's market. With compelling yields across the bond market, now may not be the time to be overexposed to risky assets.
Alternative Asset Allocation Fund Asset-Based Lending Fund Diversified Macro Fund Infrastructure Fund
Pursue enhanced diversification
Consider increasing exposure to investments that pursue alternative approaches and offer low correlations to stocks and bonds. There are a number of ways to reduce overall volatility through an allocation to alternatives, and a lower risk profile in turbulent markets is typically a prudent move.
Diversification does not guarantee a profit or eliminate the risk of a loss. Correlation is a statistical measure that describes how investments move in relation to each other, which ranges from –1.0 to 1.0. The closer the number is to 1.0 or –1.0, the more closely the two investments are related.
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