Recent data suggests that key parts of the U.S. GDP are still expanding, despite the impact of inflation, the pandemic, and geopolitical developments.
Based on the latest fundamentals, our forecast is for the US economy to expand by a slight .7% upward toward 1.4%. The base case avoids recession but is below-trend GDP growth. This is due to higher interest rates and very confusing economic data that likely leads to near-term volatility. I have highlighted some of the issues causing the turbulence.
- The domestic employment environment is nearing full strength, but consumer confidence still is trending negative. The consumer is digesting a mixed bag of information, creating deserved confusion.
- Drawdown in stocks and bonds over the first half of the year was the worst we have seen in 50 years. The average increase over the next 6 months after a washout like we have seen, averages a gain of 21.5% historically.
- Higher prices and increasing interest rates are cooling real estate markets. This contributes to buyers canceling deals at the fastest pace since the pandemic.
- Businesses are expanding but growth is slowing; exports are under pressure due to geopolitical tensions in Europe and a rising dollar. Core inflation is hovering at 6.3% but forecasts predict normalization falling to 4.3% by the end of the year.
- The Federal Reserve is expected to raise rates by .75% this month followed by .50% in September and continued smaller hikes of .25% to follow.
- The supply chain for goods and services continues to be disrupted by the conflict in the Ukraine as well as late spring spike in Covid cases in China.
Multiple headwinds have been placing pressure on the domestic economy and financial markets. Consequently, the debate over the current state of progress is murky and recession may loom on the horizon. On the optimistic end, one research partner suggests a 30% chance of recession in 2022 while others are neutral, reporting a 50% chance in 2023. As mentioned above, the base-case research avoids a recession, but does show slowing GDP growth to come.
What would that look like potentially for the equity market?
On the positive side, if earnings provide resilience, we anticipate further appreciation across equity markets. Positive reports may provide an S&P 500 rally toward 4300 by year end, a 10-12% increase. However, if earnings reports weaken the S&P may slide an additional 15-20% towards a year-end target at 3150. That is over a 30% swing depending on the economic ‘tug of war’ pressures in the middle of in 2022.
We believe that a strategy that has exposure to global stocks with great balanced sheets, short-term corporate bonds and alternative investments provide a buffer to the volatility. As pressures ease in the listed points above, we anticipate a normalization for the second half of the year.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.