At the beginning of every year, everyone demands to know what the next 12 months will be like when it comes to the stock market and investment outlook.
At the beginning of every year, everyone demands to know what the next 12 months will be like when it comes to the stock market and investment outlook. Although we’ve all had some surprises, the partners at Wall Street Alliance Group have some ideas about the economic outlook and what sectors to watch when making allocation decisions.
1. A different cycle
After the past decade of low interest rates and low inflation, we are looking forward to a very different future. Persistent inflation and federal funds rates hovering near 5% seem to be the story of the current cycle. The economy will face challenges from the employment sector as the labor market adjusts to shifts in immigration policy and other factors constraining the labor supply. Employer costs will rise as employers offer more incentives and higher wages to obtain and retain workers. Gone are the days of inexpensive manufacturing. Notable companies are moving production out of China as the country goes through turmoil.
What does this mean in the financial arena? Large banks benefit from higher net interest margins with higher interest rates coming from the Federal Reserve. Dividend-paying companies are also finding their footing in this type of economy, while on the other end of the spectrum, companies considered high-growth are losing ground because their lack of dividends cannot support the trading activity that once supported them.
2. Continuing inflation fears from the geopolitical environment
It’s not just the situation in China that is prompting US companies like Apple to move their facilities out of the country, ending cheaper production time. The ongoing war in Europe, which has had a negative impact on energy supplies and prompted inflation fears, is another example of the kind of turmoil that is fueling concern about inflation. Low worker participation rates in the United States, which have forced employers to offer higher wages, as mentioned earlier, is another factor leading to these higher prices. All this created a prolonged period of inflation and fear of inflation.
3. The value of shares and opportunities
This kind of financial environment is bringing back interest in Warren Buffett’s style of value investing. As large banks benefit from higher interest margins, portfolios holding relevant positions are able to thrive. Although there is some interest in moving away from dependence on fossil fuels, the transition is slow, and we believe that OPEC cuts as well as other international tensions will mean lower oil supplies. However, the global economy is expected to double by 2045, which will not come without an increase in energy demand. As expected, Buffett is also buying into major oil companies. This is not the time to miss opportunities. Many experienced buyers have bought stocks over the past year, particularly in these sectors and those that pay dividends.
4. It’s time to take revenge
Having survived the COVID-19 shutdown, Americans are ready to chip away at losses and spending. We see this trend strong throughout 2023, as people spend in areas they were not previously able to, especially for travel, because many were denied the pleasure of it during the pandemic. Even with Americans’ drive to get out and see the world, especially with international travel, airlines haven’t made friends. Rising fuel costs made airfare more expensive, and airlines were hit with a number of other problems, including staff retention. However, travel will continue to increase, and there may be some benefits to credit card companies who will make huge amounts of money from international transactions.
5. Market leadership changes
The past five years have seen the technology lead the market; However, we feel this is about to change. Over the next five years, he looked forward to seeing leadership come from the energy, pharmaceutical and financial sectors. As we wrote earlier, demand for oil will remain high in a growing economy and will rise and supply constraints will drive up prices, benefiting the oil majors with the largest holdings. Greater healthcare access and a booming global population mean a broader market for drug companies, and major drug manufacturers will benefit from both. Finally, although a recession seems inevitable, we don’t think it will be long or severe, given the current stable state of banks (as opposed to their weakness in 2008). The 2022 federal stress test has not been challenging for the larger banks, and they are expected to benefit greatly from the federally high rates we discussed before. These three sectors will lead the way in the coming years.
6. Range-bound market
When talk of a recession creeps in, the specter of 2008 looms large. However, we do not think that the United States is in the same position as it was at that time. Consumer spending remains strong, even as inflation rates rise, and despite layoffs in tech, other industries, including hospitality and entertainment, are hiring workers at a brisk pace. The housing market has slowed but not completely stopped, even as mortgage rates have more than doubled over the course of a year. The Fed is aware of the path it is plotting during a controlled recession, which means a range bound market. This suggests that there are areas of weakness as well as opportunities, and while a passive strategy focusing on sectors such as technology has worked in the past, this is probably not the best move in the new market era. Active management with rebalancing as a recurring activity would be more appropriate for the market to ensure exposure is provided on the dips and a bit of removal of positions on the upside. The key aspect of this is acknowledging that there is some sort of waiting pattern and seizing opportunities while you wait.
7. The bull case for fixed income
It’s no secret that big banks are raising their rates as inflation continues at a level not seen in years. These higher rates also lead to an increase in interest rates on domestic and international bonds. Although the current bond investors are feeling the pressure, we believe the next decade will have a better outlook than others predicted a year ago. We believe that there will be a yield on US bonds of 4.1% to 5.1% annually, in contrast to other forecasts that set the yield at 1.4% to 2.4%. International bonds will not be left out in the cold either. We believe that the next decade will yield returns at about the same rate.
8. Alternative and real assets as a hedge against inflation
Fighting inflation is not the same game it was 20 years ago. The other strategy to hedge against inflation is to invest in real and alternative assets. Real assets have a stable historical value in times of high inflation. While they may not be the first things you think of in periods like these, now is the time to invest in commodities like precious metals and oil, or even real assets like antique paintings or other valuable items. These assets are non-cyclical in nature and can provide a different kind of stability to the portfolio.
9. It’s time to turn the roth and reap the tax losses
Although this advice goes against the usual advice not to sell during a market downturn, not all stocks have the potential to recover even as the market rebounds. By selling the underperforming stock now, we believe these losses will lower taxable earnings and save investors taxes. To benefit further, the cash from sales can be used to purchase stock from companies like Amazon that are likely to rebound quickly in a bull market. It’s also a good time for Roth conversions, because individual retirement account values have been slashed along with the huge losses in the stock market. Making a Roth conversion now means that the account holder will be able to pay less taxes at the time of the conversion while benefiting from tax-free growth and tax-free withdrawals at a later date.
10. Gifting expendable stocks to children
It’s the fact that stock gifts to children mean that the child, who has little or no income, will pay much less capital gains taxes. If gifting stocks was part of your old planning, the depreciating value that stocks make now is an ideal time to put this in its place. Starting in 2023, you can gift up to $17,000 in stock without paying gift taxes or even reporting the gift. Another way to move these depreciated stocks out of quality companies out of real estate is to open a SLAT (Spouse for Life Access Fund). Once the assets are transferred to the trust, they can continue to grow estate tax free.
Although there is no way to very accurately predict what the economy will do over the next year, five years, or decade, we believe that trends can be identified that give us a good idea of what we will see in the future. By incorporating these guidelines into your financial planning and keeping these expectations in mind as you reallocate your financial portfolios, you may be able to make the most of a challenging year.
Mr. Nashat Boao Forum for AsiaAnd And Adel Zaman , MBA, partners and fiduciary financial advisors at the Wall Street Alliance Group. The securities are offered by Securities America, Inc. , member FINRA/SIPC. Advisory services provided through Securities America Advisors, Inc. The Wall Street Alliance Group and Securities America are two separate companies. Securities America and its representatives do not provide tax or legal advice; Therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation.