Scott Kahan Outlook 2023 – The Recession Watch?

Scott Kahan Outlook 2023 – The Recession Watch?

Shall we just call 2023 The Year of the Recession Watch?

Well, there’s no dearth of experts weighing in on when and how severe the 2023 Recession will be. All yielding tasty click throughs for that part of the media catering to the investment community and consumers of personal finance information.

What’s surprising to everybody is that there are no signs of recession out there. To some degree we are in uncharted territory due to the pandemic, but consumer spending was up in January, job creation is strong, the real estate market has slowed although mortgage rates have come down slightly and people are buying homes.

I don’t anticipate we will have a severe recession this year although at some point we will have a recession. They are and always have been part of the economic cycle. Which is why I always tell my clients to turn off the experts, or one might say the purveyors of doom and gloom, who are paid it often seems to be continually wrong. Like the economic cycle itself, they are inevitable. Best to stay focused on your financial plan and portfolio allocations.

Where are we now, in what inning are we in the process to unwind inflation?

 Yes, despite the economic outlook, inflation remains stubbornly high although it has come down but not at the pace that the Fed would like.  The Fed has been pushing rates higher. Energy prices have come down and they were predicted to spike during the winter. But that hasn’t stopped people from spending. Or wages from increasing.

There’s an old saying “don’t fight the Fed” when making investment decisions. And that certainly played into last year’s when the S&P was down over 19% for the year – its worst year since 2008. And bonds followed suit to the tune of a 13% drop. But stock prices are up so far this year because people believe the Fed may be making progress towards their goal and that future interest rate increases will moderate.

Is it worth going through the Fed’s actions in 2022?

I think so because it supports the theory. Federal Reserve Chair Powell raised the Federal Funds rate seven times last year bringing rates to its current 4.5 to 4.75 level from a starting point of just 1/4 point. 2022’s Fed actions included four consecutive 3/4-point increases – unprecedented actions in the history of the Federal Reserve. Since then, the Fed has moderated its pace, increasing the Fed Funds rate by half a point in December and 1/4 point last year.

When investors see the end of the rate increases coming that’s when stock prices rise again. That’s what happened in January, but the market got ahead of itself. And it has given back some of its early year gains in the past week. Nonetheless as investors gain confidence that the Fed is topping out its increases which many people see at the 5% level, we should see a stock rally. And bond rally, too. Because when stocks and bonds sink together, as they did last year, they usually rise together.

What’s your take on bond’s attractiveness right now?

We like bond funds and ETFs. We always have a mix of short and intermediate bonds. We have recently increased our allocations into intermediate bonds. There’s more yield there. That said we are not increasing our allocations in bonds vs. stocks. We are just changing our mix within bonds. Remember the Fed controls short term rates, and the market controls the rest of the bond market. Long term rates have been flat, which represents a bullish outlook on the ability of the Fed to control inflation and cease rate increases.

While there’s money to be made in bonds, as we haven’t seen rates this attractive in decades, remember that Treasury bills and CDs which are topping out at 5% now are great for short term money. But if you place longer term money there, you will be chasing the market again when treasuries come down and stocks are heading higher. So short term parking yes. Changing your financial plan and your planned portfolio allocations to capture more bond yields – no. We’re sticking to our pre-designed allocation mixes whether that be 50/50 or 60/40 stocks and bonds.

How are your clients handling everything? 

In 2022 our clients went through the full five stages of grief, because it is emotional to lose money. Finally, they stopped looking at their statements and reached the acceptance stage. But as January rolled in and stocks rose again, people re-engaged and started looking at their statements again. So, this recent swoon, I suspect came too early for their tastes. But they haven’t reached the fear stage – that the market is going down and won’t stop.

I have discussed with them the likelihood that we will continue to see volatility in 2023. But as we get a clear indication that the Fed is close to the end of rate increases, we should see the bond and stock markets rise. Sooner or later markets will react to the fact that the economy is strong and corporate earnings will, once again, rule the day.

Financial Asset Management Corporation has provided fee-only financial planning and investment management services for individuals and small businesses in the Tri-State area since 1986. They serve 175 clients and manage over 325 million dollars in assets. (26 South Greeley Avenue, Chappaqua, NY, (914) 238-8900; www.famcorporation.com )

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