5 big wealth management firms on 2023 markets and the economy

February 2, 2023 9:51 PM

Investors and wealth managers could be forgiven for thinking they're living in an M.C. Escher drawing of tangled geometry.

Predictions of where markets and the economy are headed in 2023 are colliding with data and geopolitical events that appear to warp the picture. On one rung are the highest inflation in 40 years, spiking interest rates, a possible recession and tight labor market. On another level lie global disruptions from the COVID-10 pandemic, Russia's invasion of Ukraine and shifting attitudes about work.

Here are perspectives from 5 large wealth management companies about what to expect next. Like the angles in an Escher drawing, what's seen depends upon the viewer.

Bloomberg News

Morgan Stanley

In a Jan. 31 note, Morgan Stanley's chief investment officer for wealth management, Lisa Shalett, wrote that investors have four reasons to steel themselves for tighter financial conditions.

Despite the S&P 500 starting off 2023 strong — up 9% so far this year after a roughly 18% tumble last year — "the path of inflation and pace of monetary tightening are still far from certain," she wrote. The recent mini-rally "may have more to do with rapidly easing financial conditions, such as lower oil prices and higher consumer spending. "Investors hoping for a new bull market are likely to be disappointed if financial conditions tighten in the coming months."

"Particular caution is warranted" around four trends: slumping oil prices, a decline in longer-term Treasury yields, a debt ceiling resolution that could drain liquidity from bond markets and dwindling consumer savings.

"Given these trends, and as tempting as it might be, investors should not interpret the January rebound in stocks as the beginning of a new bull market. Economic fundamentals have not troughed, and earnings estimates have not recalibrated to reflect the reality of a slowdown." Shallet added that the trends "have combined to create a rare setup for easy financial conditions, and we have reason to believe they will reverse, causing a midyear liquidity crunch."

Bloomberg News

J. P. Morgan Asset Management

In an undated 1Q 2023 economic and market update, J.P. Morgan Asset Management flagged multiple trends and factors — some positive, some concerning.

"Volatility was a defining feature of the markets in 2022, as higher interest rates and inflation, Russia's war in Ukraine and recession fears sent markets tumbling."
"However, calmer waters should lie ahead for investors. Inflation is falling, the Fed is nearing the end of its tightening cycle, and much of the expected weakness in economic growth is already reflected in market valuations."
"Entering the first quarter of 2023, there is a growing danger that the U.S. economy could slip into recession. While the U.S. consumer has been largely resilient so far, higher interest rates have weighed on home building, trade and business investment."
"The labor market continues to be a bright spot in an otherwise gloomy environment … However, the economy is now losing momentum, even in the labor market."
"Consensus expectations for a double-digit gain in earnings in 2023 look too optimistic, and we expect earnings will more likely be flat-to-down relative to 2022."
"Inflation has peaked and should gradually fall."
"Global economic momentum has also slowed."
"The Federal Reserve is nearing the end of its tightening cycle."
"The sell-off in markets this year has presented investors with attractive opportunities."
"The inverse stock-bond relationship should reassert itself. Performance in 2022 was particularly unique because the bear market in stocks was accentuated by a bear market in bonds. A portfolio with 60% invested in the S&P 500 and 40% in the Bloomberg U.S. Aggregate Bond index fell 16% in 2022, marking the second worst year for a 60/40 portfolio since 1974. However, a negative correlation between stocks and bonds is still overwhelmingly the norm."

Bloomberg News

LPL Financial

LPL on Jan. 30 pointed to a "trinity: a "Santa Claus rally" in stocks during the last trading days of the year, an early 2023 market upswing and the historically expected good news that brings for the rest of the year.

"The trifecta accomplished this month has historically led to some very strong returns. The S&P 500 has, on average, added 12.3% to a 4.6% January gain between February and December, bringing the average gain for these years to over 17%. This sounds like a big gain, and it is, but keep in mind the average gain in the third year of the four-year presidential cycle is 16.8%, and the average year following a down year is up 15%."

"It's also worth noting that with the broad market slipping nearly 20% last year, this gain still would not get the market back to the 2022 high set on January 3, 2022. Stocks enter 2023 much more attractively valued than a year ago — roughly 18 times forward (2023) earnings as compared to over 21 times forward (2022) earnings a year ago."

"The script has been flipped in 2023. Last year's underperformers have turned into outperformers this year, driving the S&P 500 Index up over 5% this month. The pace and composition of the rally have left many investors skeptical over its sustainability, especially amid a lackluster earnings season thus far."

"Of course, the market is also forward-looking, with expectations for falling inflation and a less hawkish Federal Reserve (Fed) as we progress into 2023. And although the trajectory of the rally will likely slow, seasonal indicators point to a path higher for U.S. equity markets by year-end."

Merrill

Bank of America Merrill's chief investment officer wrote Jan. 30 that "while we ultimately expect that 2023 will be a year in which the cyclical bear market converges back into the secular bull market trend, equity market volatility is likely to persist through early 2023 as the global growth slowdown progresses.

"In the near term, there could be more downside to equities as the economy and profit cycle further deteriorates. However, most of the financial community is expecting this outcome, which could create a floor under the possibility of a significant equity drawdown from these levels. Recessions bring about a decline in risk assets due to the shock and surprise factor, but that condition is missing today."

At the same time, Merrill outlined "key triggers investors should be mindful of, a combination of which could ultimately indicate the beginnings of a new equity bull cycle."

Labor market weakness: "Once the adjustment in the supply/demand imbalance in the labor market has run its course and jobless claims peak, equities should get a fresh tailwind. We expect this to happen toward the second half of 2023."
Earnings: BofA Global Research forecasts a 9% decline in earnings per share (EPS) for 2023, and "risks remain skewed to the downside as economic activity slows and higher labor costs continue to squeeze profit margins … It's our view that 2023 forecasts are still too optimistic with consensus anticipating a 3% rise in earnings per share."
Inflation: Price increases are moving closer to the Fed's target, but "the Fed's closely watched measure of core services continues to see upward pressure from resilient consumer demand … A moderation of these factors may be required for inflation to move meaningfully lower toward the Fed's 2% target, which would ultimately allow the Fed to ease and could propel a sustained uptrend for equities."
Treasury yields: "We are cautiously optimistic that the 2-year yield has peaked, but the resilient labor market and still-elevated levels of core inflation present the risk that the Fed may need to keep rates higher for longer."
Volatility spikes: "The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which measures the volatility level for the S&P 500 Index, currently hovers around 20, which is slightly above historic averages but well below the level that would typically be considered a turning point for equities. Equity market troughs have closely followed when the VIX has risen above 40 during past market downturns. On the other side of the coin, the VIX's recent year-to-date low of 18.4 could signal more downside ahead, as drops below 20 corresponded with the reversal of equity rallies in four different situations in 2022: in January, April, August and December."
The U.S. Dollar weakens: "Over the medium term, the dollar is likely to weaken. This would be a trigger for more constructive relative performance of international equities vs. U.S. equities."

Fidelity Investments

Fidelity Investments wrote on Jan. 31 that "market volatility in 2023 could provide even greater valuation opportunities, as many recessionary periods historically coincided with high levels of investor pessimism and ended up providing solid entry points for new investments."

It pinpointed 5 key trends:

Inflation rates will decline markedly in 2023 but remain higher than the market anticipates.

The Fed will slow its tightening cycle and eventually stop hiking rates during 2023, but its policy rate will remain higher for longer than expected.
The U.S. economy will decelerate into a recession. Our base case is that it will be a relatively mild economic contraction, but we're actively monitoring downside risks.
Through fits and starts, China's relaxation of COVID restrictions may prompt a rebound in services activities and lead to a cyclical economic uptick.
Interest rates — the yields on Treasury bills and bonds — are likely to remain volatile and trend lower.