Opportunities on the Horizon: Investing Through a Slowing Economy

Overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 13 FIGURE 4 . How the Recovery May Unfold Across 2023 FEDERAL RESERVE RAISES RATES TO 4.75-5.0% POSITIVE EMPLOYMENT TURNS TONEGATIVE EMPLOYMENT US DOLLAR BEGINS TO FALL FED HALTS RATE INCREASES (AND EVENTUALLY CUTS) US RECESSION UNDERWAY ECONOMY BOTTOMS MARKETS ANTICIPATE RECOVERY Source: Cit Global Wealth Investments’ Office of the Chief Investment Strategist as of March 31, 2023. All forecasts and expressions of opinion are subject to change without notice, and are not intended to be a guarantee of future events. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. FIGURE 5 . The Bear Market Has Claimed Victims in Smaller Companies 10 15 20 25 30 35 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 Forward 12m PE Equal-weighted Nasdaq 100 Nasdaq Mid-Cap growth Source: Bloomberg as of May 26, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. A journey unfinished We continue to believe that the worst of the reckoning is behind us. But, we aren’t at the end of the bear market journey quite yet. In our Roadmap to Recovery (See Wealth Outlook 2023: Roadmap to Recovery) we argued there is a likely sequence of events that will need to unfold before we arrive at a true, sustained expansion ( FIGURE 4 ) . In short, it is simply too early to price in a new economic recovery while the Federal Reserve is still tightening monetary policy. So far this year, investment performance across styles and sectors has been inconsistent. Our asset allocation has maintained a “quality income vigil.” We have retained an overweight stance on the most consistent dividend growers or companies with the strongest balance sheets since January 2022. In the AVS Risk Level 3 Portfolio, we have remained underweight small cap equities, companies that generally are more indebted and less able to endure macroeconomic cycles and shocks. Our overweight position on bonds remains concentrated in US government issues. While our near-term returns may lag behind episodic rallies, our positions should hold up against any selloffs. At the same time, the benefits of “playing defense” have been diminishing. Valuations are improving in some of the less defensive assets where we are currently underweight ( FIGURE 5 ) .