Opportunities on the Horizon: Investing Through a Slowing Economy

Overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 14 FIGURE 6 : Correlation between Stock and Bond Returns -30 -20 -10 0 10 20 30% 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 S&P 500 Return Yield (%) 10yr UST Yield (Inverted) S&P 500 30-Day Rolling Total Return Source: Factset as of May 4, 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. FIGURE 7 : Money Supply Leads Inflation by 2 Full Years -20 -10 0 10 20 30 40 -15 -10 -5 0 5 10 15 20 25 30 '25 '30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20 Y/Y% Change Y/Y% Change CPI (Lagged 24 Months) M2 Money Supply (Post 1959) M2 Money Supply (Pre 1969) Source: Haver Analytics as of May 11, 2023. The benefits of diversification are evident again After sharp yield increases, government bonds are again providing both regular income and a negative correlation to risk assets (See Bonds are Back Again: Where to find potential fixed income opportunities now ) . These are the properties that allow balanced stock and bond portfolios to have higher risk adjusted returns than individual asset classes ( FIGURE 6 ) . Thus far, performance of balanced portfolios suggests a period of stronger longer-term returns ahead. Our updated economic forecast We have always believed that one global shock should not require two recessions. The supply disruptions that came with COVID were not historically unique. All global supply shocks —whether through wars or embargoes — have destabilized consumer prices for a time ( FIGURE 7 ) . Policymakers arguably succeeded in limiting long-lasting economic damage from the initial pandemic shock. But their decision to provide broad and sustained stimulus even during the post-COVID recovery exacerbated a mismatch in supply and demand. As the Fed eased monetary policy all through the US growth boom of 2021, inflation surged along with real GDP, which rose 6%. Subsequently, the Fed chose to tighten monetary policy through the present economic slowdown.