2023 Midyear Market Outlook
While we can’t look into the future, each year, we feature a webinar that peers into a crystal ball and shares what we expect to see from the markets during the second half of the year. On this episode of Your Life Simplified, Valerie Escobar, senior wealth advisor, is joined by Jeff Krumpelman, chief investment strategies and head of equities. Jeff gives an overview of how the first half of the year went and where he thinks the markets will go for the rest of 2023.
Valerie: You know, I’ve never been to a psychic, never had my palms read, but I’ve always thought it would be really interesting to be able to look into the future. Every year, actually twice a year, I believe, we have the privilege of trying to take our best guess at looking into a crystal ball and deciding what the future might hold. Today’s episode, what that outlook is going to be.
I’m Valerie Escobar, certified financial planner and advisor with Mariner Wealth Advisors. I am joined today by Jeff Krumpelman, chief investment strategist and head of equities. Jeff, thanks so much for joining us.
Jeff: Thanks for having me, Valerie.
Valerie: Absolutely. So Jeff, I am really glad to know that you have this crystal ball that you look into. How often is that, does that come up that you’re really expected to be able to tell us what the future’s going to hold in the world of equities?
Jeff: Well, I think you said twice a year is when we do this, and really it’s the January crystal ball where we come out with our outlook for the calendar year and then we simply, as we go through the year, in midyear, we kind of say it’s like going into halftime. What do we think? How did we play the first half? Were there a lot of surprises? Are there adjustments that we need to make to our thinking? And how do we expect the third and fourth quarter to go? And so it’s only twice a year. I think the other thing that, you talk about, a lot of folks really think this is prophecy or something, and we work very hard not to paint ourselves in a corner. And what we do when we lay out the future, it’s all probability based and it’s based on the data.
We have a base case. This is how we expect the game plan to go. And it assumes these different factors: that the economy grows so fast, that interest rates hover at these levels, that these wall of worry items hit and they’re resolved in some fashion. And if all that comes to place, and we think the odds are that it will, then this will be the end result. However, if this should happen, maybe it’s better than we thought. Okay, that’s fun—it’s going to be higher. If on the other hand, these other risk factors become more prevalent, more troublesome, then this would be the downside that we see out there. And we put probabilities in those different scenarios. So it’s not like, oh, we think it’s going to be 4,500 for the S&P 500 come heck or high water. We just think that, it’s really based on facts and data. Just like when the Fed makes decisions, they are data dependent, and they look at the incoming data, and then they’ll make their decision, what they should do as the months progress. I mean, we do the same thing.
Valerie: And while we’re talking about the Fed, I mean, they have a big job that they want to help do their part to stabilize the economy. And so, tell us what data are they seeing—or maybe I’ll ask that question differently. What do we expect out of the Fed coming up for the rest of this year?
Jeff: Yeah, well, it’s interesting, and you can’t divorce what the Fed does from personalities and agendas that you have, right? And so, a lot of folks will say to me, and we’ve been one of the rare voices on Wall Street or in this business that have held a positive view for this year. And one of the reasons that people have been so skeptical is that they thought that the Fed was conducting what they called unprecedented policy of hiking rates. Well, we viewed it differently. What was unprecedented was what had come before—we were at 0% interest rates. That’s absurd. And that was instituted at an emergency time in 2007, 2008, and it’s continued, and it has caused stocks to go through a just, what, 15-year bull market because there was no alternative. Well, that’s not normal. What’s normal is where we are right now, and that’s all the Fed has done. It’s returned us to normal.
So, while you’re in that transition, we recognize that probably stocks are going to be volatile, and they may anticipate in advance, like they did last year as the Fed started to shift and transition to normal, they might anticipate recession in bad times. And that’s what we had in 2022. We had a 25% pullback in anticipation of recession in ’23 that hasn’t happened. And I think that what will happen is that the market is getting comfortable with the fact that this is just normal. Now, they might overshoot a little bit, and this is where you get into personalities.
You had this guy named Jerome Powell, and for the longest time, Jerome Powell, he’s a guy that really cares about employment, he cares about equality in income, and that was his agenda for the longest time. Now, he pivoted a couple of times under Trump. He started to normalize. And Donald Trump, when president said, “Hey dude, you’re doing this too quickly. You need to cut rates because I’ve got this trade war going on and that’s going to slow the economy, and you’re going to kill us and put us into a recession. Don’t do it.” And you know what? He liked his job. So Jerome said, “Ooh, I better pivot.” And he did.
Now that we came through this inflationary environment that was a surprise at coming out of pandemic, supply chain issues, a labor market that was extremely tight, that led to this more sticky inflation than anticipated. Jerome Powell also has an ego and he doesn’t want to be perceived as Arthur Burns, who was the Fed chair back in the 1970s when we had oil embargoes and prime rate went to 20%, and we had fed funds rate of north of 15%. He doesn’t want to be perceived as a horrible Fed chair that allowed that to happen, hyperinflation. So, he became uber-vigilant. But ultimately, what he truly is is a full-employment, equal income kind of Fed chair. And I think we’re in the eighth or ninth inning, and he has talked hawkish because he doesn’t want to be Arthur Burns à la 1970. But I think that as inflation has calmed, as it should given what they’ve done and given the recovery in supply chain, we’re normalizing on inflation.
So, you know what, if he errs towards the side of conservatism, and they hike again in July, which they very well could—odds are 75% that they do that—we’re still just at five-and-a-half percent fed funds rate. While we have just the data that came out today, consumer confidence shot up far higher than expected and new home starts are far exceeding where they are and we’re close, we’re virtually at full employment. So, I don’t think what they’ve done has derailed a recovery both in earnings in 2024, nor has it decimated sentiment on the part of investors, and therefore, even if they would just … what did they call it? It was a pause or a skip, and there’s this debate: Is it a skip or pause? I don’t care. Either one, I think the market’s headed higher because inflation is coming in.
Valerie: Yeah. And so it almost sounds like you’re saying it’s like this medicine that we’ve just not wanted to take. We’ve been so used to things being really easy and not paying any interest on our mortgages and everything else. And the Fed’s saying, “You know what? We need that tool in case we do get tough times and we need to cut rates.”
Jeff: I think so, yeah.
Valerie: And I guess that’s the next piece of my question, too, is where are we in the cycle? Usually, we think about that chart that’s kind of like it goes up and goes down, and we get bulls and we get bears. I think with recession, or I’m sorry with the inflation, that we kind of got the sentiment, “Oh my goodness, the whole world’s going to crumble. We’re definitely going into a long-term bear,” or at least that was a big sentiment that I was hearing. What is your thought on that? Where do you think we are on that cycle?
Jeff: Well, first of all, I think that folks, when you’re investing in the market, you need to take a deep breath. And one of the beautiful things about investing in the United States, sometimes we fail to appreciate how lucky we are.
Jeff: Earnings are positive, and the economy expands 80% of the time. We are in recession only 13% of the time. The market goes up 80% of the time. So, this is one of the rare industries where it does not pay to be a pessimist. You’re not going to be right half the time or flip of the coin if you’re negative. So, the data better be negative for you to be negative. And there are times to be negative and defensive and cautious, but when the data is neutral and people are saying it’s horrible, that’s not a time to be negative. That’s a time to hold your ground. And that’s been our message. And so where we see ourselves in the cycle, whenever you’ve got an economic cycle and you’ve got the market, and the market actually moves in advance of the economy in that cycle. But let’s just talk about the market for a minute, that incorporates economic analysis.
We look at fundamentals, we look at valuation levels, and we look at technical price trends. And when we look at fundamentals, we’re looking at the economy and earnings and rates. And the economy is actually in a slow-growth, kind of soft landing mode. There’s nothing that says we are in a recession despite the traditional indicators of recession, an inverted yield curve, which everyone cites. People also cite the fact that manufacturing activity has gone into decline mode, manufacturing has, and that’s a typical negative. The residential housing market has been soft, and they throw those kinds of things out. For every bear argument like that, I can say, “Well, yeah, but we’re at 3.7% unemployment. We’ve got wage growth when prices are decelerating. So that means after-inflation income is rising where all-time lows in terms of debt service, stress, great balance sheets on the part of consumers. And oh, by the way, while residential housing is in slow down, you have multifamily and non-res, it’s at all-time highs, and you have a capital spending boom going on because of all these bills that have been passed as we reonshore.”
So, when I look at all that stuff, it’s mixed, and I really see kind of a rolling recession in the economy, not a typical boom-bust. You may have pockets of weakness, but you’ve got pockets of uber-strength. So, you mix that in a big soup bowl, and it’s neutral to positive. And then you look at valuation levels, and everybody will say, “Oh my gosh, we’re at 18 times, that’s expensive.” Well, we’re at 30 times in eight stocks. The Mega-8 stocks are trading at 30 over 30 times, 492 stocks in the S&P 500 are trading at 15 times or below.
So, that’s neutral to attractive. It’s below average over the last 10 years. So, I don’t think you can make valuation a bear case, which they want to. And when you look at earnings, that’s the other thing that bears want to talk about, the average decline in earnings in a true recession bear market, a hard-landing recession like ’07, ’08, is somewhere a decline in earnings of 17% to 30%. Earnings should be up about 3% this year. Worst case, they’re flat. Next year, they should be up 10%. They’re holding in. Profit margins are beginning to improve as inflation falls, wage increases fall, productivity troughs and begins to increase and revenues have held up. So, it’s really hard for me to go to that uber-skeptical. And then, people will point to the technicals and the price trends. The other bear argument is, “Well, gee, Jeff, the only reason the market’s up is because eight stocks are advancing.”
That was over-advertised. That was not true. There were a number of industry groups, and we have internal strategies that we manage, our most flexible and aggressive strategy was neutral to under-owning those Mega-8. And the reason we did that was because we owned some of these growth stocks that were declared to be dead that were things like CrowdStrike and Palo Alto and Synopsys and Bookings and Decker Shoes—all kinds of beautiful growth stocks that were extremely cheap. And so the market was broader than folks advertised then, but over the last month, it’s really broadened. The industrials are participating, and that’s a good sign. It’s not just a few stocks that are going up. We need to see more of that. It’s not perfect. It’s not beautiful. It’s not 90% of stocks above their 200-day moving average, which you see in a typical bull run, but it’s 60%. It’s not 30. So, that gives us comfort and conviction that we’re on a good path, a less-worse path. That’s all you need for the market to advance, less worse.
Valerie: And I mean, it’s making it hard to be a pessimist, to look at it and be sad, which is awesome. I love not being sad. And I mean, in the end, there is so many options. And so, yes, maybe there’s a little bit of bad, but when are you ever going to get everything completely golden? And so, sounds like there’s lots of opportunity, lots of good reasons to be optimistic and to hold your course. Is that what I’m hearing?
Jeff: Hold your course. And the reason people ask me a lot, I think it seems like, and I love this quote, there’s a book called “Factfulness,” and the gentleman who wrote it, I think it’s Rosling, he’s a medical doctor and a Ph.D. both. And he does all kinds of great research on just the world order and facts about the world, poverty rates, education, where we stand on education of young women throughout the world, health, climate, all that stuff. And his whole point is that we’re living in the 1960s. We think the statistics are worsening, and actually they’re getting less worse—we just don’t realize it because of the negative media press that we get. And he says, “You know what? I’m a possiblist. I’m not, people accuse me of being an optimist. I’m not an optimist. An optimist means you’re naïve and you’re not, you’re biased and you’re always positive. Possiblist says, “I’m open to the facts, and the fact that it could be good or bad, but it looks like we’re on a course of possibly really improving.”
And the reason that I’m not an optimist and just uber-positive right now is because we’re neutral in those things that I just mentioned, and there are issues out there. And so at that point in time, you don’t want to be, “Buy on the dips, oh, let’s go baby. We’re off to the races.” But you also want to be a realist or a possiblist and say, “Things are not getting worse. They’re getting less worse.” So, hold your ground. Wait until everyone else is in our camp, in our view, because of some of these concerns that truly look like they’re resolved, like inflation, like, “Okay, it’s clear, the Fed’s going to pause, really.” It’s just not our prophecy. And then you’re going to enjoy the ride, and you can let your allocation ride. Right now, be neutral. If you’re a 60% long-term equity investor, that’s where your allocation should be, be there. Three years ago prior to ’22, we’re saying, “Let it ride. If it’s drifting up to 70%, let it go. Right now, we’re saying, nope, be respectful of risk, but boy, don’t run for the hills.” So yes.
Valerie: Just stay disciplined. Awesome, thank you, Jeff, so much for joining us today. For all of you listeners out there, be sure to Like and subscribe wherever you are tuning in. And also be sure to join us on our webinar, the Midyear Review and Crystal Ball Outlook. Thanks again.
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