contributed by Michael S. Cocco, CFP®, ChFC® of Beacon Wealth Partners, courtesy of LPL Financial

Now that we’re beyond the midpoint of the investing year, it’s a great time to look at where we’ve been—to help position your portfolio for the latter half of the year. Our Midyear Outlook: The Path Toward Stability does this with in-depth analyses, insights and perspectives from the LPL Research team. Today we’re bringing you a few of its key highlights.

Our investing outlook started with a theme of returning to normalcy and finding balance. And while that theme will carry us through year-end, the year has come with some challenges. We saw it in the banking sector with three large bank failures in the spring, followed by up-to-the-deadline debate about the debt ceiling. Yet, despite the market gyrations these events caused, the overall financial system seems stable. Some bright spots include:

• Inflation is under 5% at home, significantly lower than its 8.3% level this time last year
• The fed funds rate is approaching its apex as the Federal Reserve (Fed) grapples with the unknown impacts yet to emerge from its aggressive tightening cycle
• Global inflation has ticked down from its 8.7% high in 2022, and is following a slow descent to a projected 6.5% for 2023

These bright spots help shape our view on the next six months, which may come with some potential opportunities in international equities, core bonds, and industrials. Balancing things out, there are unknowns still out there—like recession and interest-rate volatility. The Fed has already indicated they may raise rates further if inflation continues to remain stubbornly high. On the other hand, rates could see a fairly sizable drop in the event of recession. What’s key here is how rate volatility resolves itself, as that will be a big driver for markets.

And while we don’t know the answer to that yet, we know that the insights found in the report will help position investors, along with guidance from their financial professional, to achieve their goals. And of course, our seasoned team of experts will be by your side, providing guidance and actionable insights as the second half unfolds.

OVERVIEW

Our 2023 investing outlook started with a theme of returning to normalcy. Considering 2022’s market volatility and the aftereffects of the pandemic, the idea of finding balance was certainly a welcomed change. It’s a theme we could all embrace six months ago and what we will continue to rally around through year-end. That’s not to say that 2023 hasn’t come with its own set of challenges. We saw two regional banks fail in rapid-fire succession in March—and another closed its doors in May. Collectively representing over $530 billion in assets, the trio ranks as the second, third, and fourth largest bank failures to date. We also held our breath as a last minute deal to raise the debt limit came together as the clock ticked closer to default. Despite the market gyrations these events caused and a banking sector still on tenterhooks, the overall financial system seems stable. Counterbalancing the challenges, some bright spots include:

• Inflation is under 5% at home, significantly lower than its 8.3% level this time last year
• The fed funds rate has potentially reached its apex with the Federal Reserve’s (Fed) quarter percent rate increase in May
• Global inflation has ticked down from its 8.7% high in 2022, and is following a slow descent to a projected 6.5% for 2023

By and large, these are things we know, definitively or directionally, a guiding force that shapes our perspective on the next six months or so. Like anything, they come with some potential opportunities for investors—opportunities that may present themselves in international equities, core bonds (particularly if the Fed is indeed done raising rates), and industrials to name a few.

On the flip side, there are uncertainties out there. Recession is probably the biggest unknown, with some of the biggest questions around when it might hit, how long it might last, and how significant it could it be. That said, any recession that occurs would appear to be more in the mild range at this point. Perhaps recession is the largest unknown, but we should also factor in the possibility for interest-rate volatility. For example, rates could move higher if inflation remains stubbornly high. Or, they could see a fairly sizable move lower in the event of recession.

The economy and markets made progress toward regaining balance in the first half of 2023, but more work lies ahead. Reclaiming that state of balance helps us feel grounded, rooted in stability and the comfort of the familiar.

Ultimately, how rate volatility resolves itself will be a big driver for markets. Clearly the LPL Research team doesn’t have a crystal ball. But there are two things we know. The insights in this report will help position investors, along with guidance from their financial professional, to achieve their goals. Second, our seasoned team of experts will be by your side, providing guidance and actionable insights as the second half unfolds.

ECONOMY

The baseline forecast is the domestic economy slides into recession in the late half of 2023 as consumer demand cools, especially for services. If job growth cools and the unemployment rate rises, consumers will likely experience declining disposable income, which could be the impetus for a recession as consumers pull back on spending. But in the near term, consumers are still unleashing pent-up demand for services. We expect the Fed to end its rate hiking campaign in the latter half of this year and introduce the possibility of a cut in rates as economic conditions weaken. But as inflation convincingly cools, markets will likely respond favorably to the slight pivot in Fed policy. So far, an improving Chinese economy has not had a material impact on global inflation.

STOCKS

In the first half of 2023, progress was made toward better balance as inflation fell and interest rates stabilized. However, macroeconomic risks remain top of mind as a potential recession looms. Earnings are likely to decline this year, but solid revenue growth and stable profit margins may help limit the magnitude of any decline. An improved inflation outlook by year-end may enable market participants to see through the economic malaise and toward recovery in 2024. Against this backdrop, LPL Research sees modest second-half gains for stocks, though with the potential for elevated volatility, until investors get more clarity on the likely depth and duration of a potential recession.

BONDS

After the most aggressive rate-hiking campaign in decades from the Fed, short-term interest rates are at levels last seen in the early 2000s. At the currently elevated levels, the risk is that these rates won’t last, and upon maturity, investors will have to reinvest proceeds at lower rates. So, unless investors have short-term income needs, they may be better served by reducing some of their excess cash holdings and extending the maturity profile of their fixed income portfolio to lock in these higher yields for longer. If the Fed is finished raising interest rates, we could start to see lower yields on intermediate-term securities before the Fed actually cuts rates. Historically, core bonds, as proxied by the Bloomberg Aggregate Bond Index, have performed well during Fed rate hike pauses.

GEOPOLITICS

The global dynamic has shifted as 2023 has progressed. An attempt to forge a negotiated settlement to end the Russia-Ukraine conflict was thwarted by an unflinching determination by both sides to win at all costs. Chinese President Xi Jinping is the latest world leader to offer a framework for ending the fighting. This framework also helps underpin China’s unrelenting determination to establish a global leadership position, as it seeks to broaden its trade and political relationships and undermine the economic power that the U.S. commands. Regarding U.S. and China bilateral relations, the backdrop has become increasingly fraught with concerns that China has intensified its efforts to secure technology that enhances its military buildup.

COMMODITIES

As prospects for the reopening of China finally became a reality, analysts cautioned that demand for industrial metals from the world’s second largest economy would help ignite a bout of inflation. Concerns that the global economy was nearing the cusp of a downturn placed significant pressure on oil prices, though China’s economic activity was initially delayed due to an escalation in COVID-19 cases. Still, the pace of economic growth in China is projected to gain momentum in the second half of 2023, potentially improving demand for a broad swath of commodities. Precious metals, however, have seen robust interest and higher prices as global central banks have been major buyers.

CURRENCIES

The U.S. dollar, as measured against a basket of developed market currencies, has been trending steadily lower since reaching 20-year highs late last September, as the key factors that were so supportive of the strengthening dollar for much of the last two years have dissipated. With markets pricing in easing from the Fed beginning early next year, the dollar’s large interest-rate advantage has eroded, making the dollar a relatively less attractive destination for global capital. Global usage of the dollar is more than stable. Nearly 90% of global foreign currency transactions involve the dollar, which suggests reports of the dollar’s imminent structural demise are greatly exaggerated.

ALTERNATIVE INVESTMENTS

Given the economic backdrop of the last six months, globally and at home, we’re constructive on alternative investments, which can offer portfolio diversification and performance that exceeds traditional benchmarks. It’s important to note that against our economic backdrop, we may see a wider range of performance among fund managers—depending on things like their trading style or geographic focus. This means that it will be more important than ever to understand the opportunities, risks, and overall strategy of any given alternative investment.

Michael Cocco is a CERTIFIED FINANCIAL PLANNER® professional with Beacon Wealth Partners in Nutley. He may be reached at  or (973) 667-8650.

This material is for general information only and is not intended to provide specific advice or recommendations for any indiv idual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All index data from FactSet.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
For a list of descriptions of the indexes and economic terms referenced, please visit our website at lplresearch.com/definitions.

Provided by Michael S. Cocco, CFP®,ChFC® 356 Franklin Avenue, Nutley NJ, 07110 (973) 667-8650

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