Where’s the Economy Heading in 2023? Full Outlook

Where’s the Economy Heading in 2023? Full Outlook

2022 was volatile. Will this year be more of the same? Like it or not, it is officially 2023 and to help you prepare for…

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2022 was volatile. Will this year be more of the same? Like it or not, it is officially 2023 and to help you prepare for the year ahead, we’ve invited Brian Andrew,  Chief Investment Officer at Johnson Financial Group on the podcast to discuss the economic outlook for 2023.

In this episode, we hit Brian with some tough questions like are we heading for a recession, how is economic growth measured, and why did the Federal Reserve raise its benchmark interest rate from 4.25 to 4.5%? We also touch on stock prices, NASDAQ, the housing marketing, crypto, the importance of what’s happening in China, and what you should be aware of heading into 2023.

There’s a lot of ground covered, but you don’t want to miss this one if you’re looking to set yourself up for financial success in 2023.

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Richie Burke:
Hey everyone. Welcome back to the GoGedders podcast, brought to you by GoGeddit Marketing and Media, ggmm.io, and our friends over at OnMilwaukee. Back on today’s podcast for a 2023 economic market update and outlook. I have with me Brian Andrew, Chief Investment Officer at Johnson Financial Group. As always, there’s a lot going on. So Brian is here to help us simplify and break that down for us so you can have a clear picture heading into 2023. Brian, thanks for coming back.

Brian Andrew:
Thank you for having me. Glad to be here.

Richie Burke:
Absolutely. So we’ve been hearing a lot of talk about a big recession that it’s coming if we’re in one. Technically we’re not in one right now, but are we heading for one and what is a recession?

Brian Andrew:
Yeah, technically we’re not in one, but a recession is really just when the economy slows down to the point where it stops growing. So we measure how fast the economy grows year over year because it tells us whether there are more jobs available, whether companies are doing better, whether individuals are doing better. So when the economy is not growing then obviously all of that is not true. And so paying attention to whether we’re having one or not is important, and also it has a bearing on the value of assets. So if you think about stock prices or the level of interest rates they move based on whether we’re in a growing economy or not. And so it’s important to understand what it is. What it is is just two consecutive quarters where the economy contracts which we had last year but that wasn’t technically a recession or at least they haven’t called it one yet. And that might be because the labor market is so strong.

Richie Burke:
How do you specifically measure whether or not the economy’s growing?

Brian Andrew:
Yeah, so if you think about what they call gross domestic product or sometimes you hear people talk about GDP growth, all that really is, is a few numbers. So it includes consumption. So if you think about you, you and I go to the store, we buy things, that’s consumption. Businesses buy things from other businesses. That’s consumption. it includes government spending. So if government spending is going up or down, that impacts how fast the economy’s growing. and then what they call business investment. so businesses investing in themselves and then trade. So are we buying more from other countries than we’re sending overseas? So, trade actually is negative because we buy more from other countries than we send overseas. and so that, that detracts a little bit from growth, but all those added together equals economic growth. And it’s interesting.

Richie Burke:
Yeah. And speaking in the economy, the jobs report came out a couple weeks ago last week as of this recording, and the report was actually pretty strong and unemployment’s looking pretty good, yet the economy remains weak, which seems like a bit of a contradiction. Can you touch on that?

Brian Andrew:
Yeah, it’s really an interesting time for labor markets and I think a lot of that just has to do with the pandemic. You know, I think the pandemic isn’t something that happened and then we get through and we get to the other side and everything’s back to normal. I think we knew coming out of it that it would take months, quarters, years for us to get over the impact of the pandemic. And so I think we’re still living with that. So one of the upside benefits of coming out of the pandemic and why the labor market is still strong, I think, is that there are a lot of people who were out of the workforce forced out of the workforce. and as things reopened and businesses started to need more labor started looking for it and jobs became more plentiful. And so last week as an example, you know, we had more than 200,000 jobs added to the economy back in December. and as you said, the, the unemployment rate continues to be way below 4% which is good news, but sort of inconsistent with what a weak economy normally gives you. although the last thing to usually get worse is the labor market. So it may just be that we’re kind of in the earlier stages of an economic slowdown in the labor market. Doesn’t get worse until later this year.

Richie Burke:
Do you still see, well, we see a lot of layoffs going on in the tech sector recently towards the end of last year and even this week some companies announced more mass layoffs there and coming. These are companies that grew pretty significantly during the pandemic. And then do you still see that in other industries companies are having a hard time finding talent and filling jobs that need to be filled?

Brian Andrew:
Yeah, it’s, it’s an interesting dynamic. and I think, you know, something we have to keep a close eye. I mean, I think everybody knows that technology has been one of the main drivers of economic growth over the last 10 years. And you know, we, we can think of sort of the f the favorite companies that people talk about all the time. Amazon being one of those, Microsoft, apple and even Netflix, if you think about them in terms of how streaming content has changed the way we develop and and digest content on a regular basis. And so those companies have all had massive growth. and so maybe what we’re seeing now is just a reflection of the fact that they grew too much too fast in the last couple years and they need to right size a little bit on what’s happening in, in terms of people’s demand for their products. Mm-hmm.

Richie Burke:
Speaking of 2022, NASDAQ was down about 28% on the year. The s and p was down about 16% on the year. What areas of the market actually performed well?

Brian Andrew:
Yeah, it’s an interesting spread between what worked and didn’t work last year. So not surprisingly, tech was one of the best places to be for the last 10 years before last year.

Richie Burke:
Especially before last year

Brian Andrew:
Especially before last year

Richie Burke:
Especially right before last

Brian Andrew:
Year, yeah, NASDAQ and in the last two years, late 20 and 21 tech was on fire. And so the NASDAQ is a technology heavy index, so not surprisingly it did a lot worse than the broader market indices. and that’s just, I think mostly a function of the fact that those stocks were way overbought. coming out of 2021 if you look at what did better last year it’s those parts of the market that were less interest rate sensitive cuz interest rates went up so much. and so there were parts of the market, like energy’s a good example. e energy broadly. So that includes refining companies and exploration companies and distribution companies all related to oil and natural gas and things of that nature. was one of the best performing sectors last year because obviously the price of energy went up considerably. and, and obviously demand, again, part of that post pandemic returned to normal. demand for energy went up a lot last year. And so you saw companies in the energy sector do really well.

Richie Burke:
The housing market’s been, it was very hot the last couple years. A lot of people, especially homeowners or people looking to get in that market are curious about it. There’s a good amount of pessimism about the housing market right now and he heading into this next year, what are your views on that?

Brian Andrew:
Yeah, I think that the housing market is interesting because when you have a slowdown in the economy, it’s actually the first thing to get weaker. So it’s not surprising that we’ve already seen weakness there. because we really started this economic slowdown last year, I think the main driver there is just the fact that interest rates went up so much. So if you think about the beginning of the year last year you could get a 30 year fixed rate mortgage for just over 3%. And at the peak last year that same mortgage interest rate was almost seven. So if you think about that in terms of how that relates to the, the price of a house that you can afford, that means that a house at the beginning of the year that was $650,000 had a payment that at that peak of 7% interest, that same payment would only buy you about a $350,000 house.
So people have to adjust what they’re looking for and what they’re thinking about in terms of what they can afford when rates go up. and that doesn’t happen overnight. and so that’s caused some weakness in the housing market. Long term though, I think, you know, demographics still favor the housing market because you have a large, large number of people in, in the 20 something to 30 something age group that will likely move in the direction of owning a home. and that will continue to, to create demand for housing just may not be houses of the same size and the same price range that they were in a year ago or two years ago.

Richie Burke:
What, what would you say to the people who are waiting for interest rates to go back down?

Brian Andrew:
Yeah, I think one of the great adages in, in home buying is you know, don’t buy the rate, buy the house. So you know, you have to buy what you can afford but if you’re waiting for interest rates to go down or go down substantially I I I’m not sure that that makes a lot of sense and you may find that they don’t go down as much as you hope. And what I mean by that is that, you know, we’re coming out of an environment where interest rates were close to zero for a, a long time be because of what happened during the pandemic. so unless we have another pandemic, I wouldn’t expect rates to kind of return to where they were back in 2020 or 2021. Yep.

Richie Burke:
Speaking of rates, the Fed recently raised its benchmark interest rate for the seventh time in a row to a range of 4.25 to 4.5% the highest it has been in 15 years. Why? And what does this mean for 2023?

Brian Andrew:
Why, why is a great question so the, the Federal Reserve controls the liquidity in the banking system. And so people are like, well, what does that mean? look, I I think about it just in, in terms of oil in an engine, right? If, if there isn’t any the engine doesn’t work cuz the parts create too much friction and heat. and so an engine’s not able to run. So you have to have the right amount of oil to make the engine run properly. If you put too much oil in an engine, that’s not good either. So the Fed can only control that liquidity based on the level of interest rates. And so they raise rates when they’re trying to slow the economy down and they lower rates when they’re trying to get it to speed up. So by a lot of estimates coming out of the pandemic, we saw economic growth rates north of 16% at the peak.
And so the Fed was like, wow, this is a problem. Too much growth means inflation. And the problem with inflation is that once you have it, people expect more of it and it changes their buying behavior. So the fed’s trying to slow the economy down to reduce inflation or reduce how fast prices are going up. and they, they only have one, well, they have a couple tools, but their primary tool is the level of interest rates. So because inflation was almost 10% at the end of last year, they felt like they needed to move rates high, higher, I should say, and move them quickly because they felt like they were behind the eight ball a little bit. And the reality is that they’re probably still behind which means we could, we could see rates move higher this,

Richie Burke:
This year. Yeah. So you, you don’t really see them coming down much in 2023.

Brian Andrew:
Certainly not in this

Richie Burke:
I know you don’t have a crystal ball in front of you

Brian Andrew:
But Yeah, no, but I, I wouldn’t expect in then in the near term that that rates would move lower because I think they’ve, they’ve come out and said, we don’t think we’ve raised them to the point we need to. So why does that matter to people? What matters? Cuz we just talked about, you know, mortgage rates are higher it means that the cost of money for businesses is higher and that’s kind of how higher rates slow the economy down. so that’s kind of the issue, right? Companies have to digest the fact that the cost of capital is up, you and I have to figure out how to maybe spend less on that new house because the cost of money is higher. and then that has the effect of slowing the economy down.

Richie Burke:
That makes sense. In an article you posted recently, you said, to expect 2023 to start volatile on the good side, that creates opportunities to leverage potential downturns in asset prices. Can you elaborate on that?

Brian Andrew:
Yeah, I, I say that a lot because I think, you know, what happens when people become fearful is that they tend to withdraw. especially if you’re an investor, if you’re fearful you get worried about what, how low the price of something could go, and then that becomes the only thing you’re focused on. And, and as investors, people who have money to put in markets or savers now’s the time to really think about where are the opportunities, because as an example, we talked about higher interest rates. Well, we know a year ago you could earn 0% interest in a money market account may maybe a 10th of a percent today you can probably earn something north of 3%. So even cash investments are producing a better return. and if you think about what you said earlier, the NASDAQ is down over 25%, the the s and p a broader market average is down 16. Well, that means stocks are cheaper today than they were a year ago. Does that mean they can’t go lower? No. but buying them at this level will produce a better return over the next 10 years than if you’ve bought ’em at the beginning of last year. so putting money in the right places makes some sense.

Richie Burke:
Do you have any overarching advice for people assessing what opportunities that they should get into or where to put their money?

Brian Andrew:
Yeah, I think the most important thing two things maybe is you should put your money in places you can understand and places that you’re passionate about. because usually if you understand an industry or a part of the market and you’re passionate about it you’re gonna pay more attention to it, you’re gonna do more research, you’re gonna dig in a little bit deeper and that likely will lead to more success as an investor. You know, if you hate real estate, you probably shouldn’t be making investments in real estate as an example. you know, if you love technology there’s lots of opportunities to invest in the technology space. so I think those are the two most important things. You know, I obviously I work for a financial services firm, so it wouldn’t be good if I didn’t say you should have a conversation with somebody who does that professionally because that’s what, you know, we, we have people who do that all day every day and they help you kind of define what your passion and interests are and then help you invest accordingly.

Richie Burke:
Absolutely. And then coming back to the volatility, you mentioned China as well. Can you explain to people what is going on there, if they’re not following and how it’s affecting things here in the U.S.?

Brian Andrew:
Yeah, so I, that’s an excellent question because I think specifically you just said, if you’re not following, if you’re not following, you should be. So China’s the second largest economy in the world. third, if you take Europe as a whole so what happens in China happens to everybody globally. in addition to that, China is on a path, an intentional path to try to become the largest economy in the world. So they’re making investments globally at a rate that’s even outsized relative to the United States. So what’s happened and what sort of changes? The way we look at 2023 is three months ago China was still closed as a result of the pandemic. So they still had a policy where they were on lockdowns and people weren’t allowed to move around much. and in November they began to reopen and change that policy. read something last week that there are somewhere in the neighborhood of 250 million people in China with Covid. so they’re gonna go through what the rest of us have gone through in 24 months, but probably in the next three or four. but coming out of that a reopen, China just means better global economic growth.

Richie Burke:
I can’t have you on without talking about crypto. So the last couple of years that we’ve done this, we ta we’ve talked a lot about crypto and Bitcoin dropped a lot last year from 48,000 on January one in 2022. Now it’s hovering around, it’s up, I think it’s up from 16 20 17. It’s a little bit thousand, it’s up a little bit. Its peak was at 64,000. So it’s still down. I mean, it’s about what a little under 25% of what it once was. And we also just had the F T X collapse, which would co was covered a ton last month. Had Jamie Diamond come out from Chase and call crypto pet rocks. What do you make of all this ?

Brian Andrew:
Yeah, it’s, I think you have to separate the coin from the technology. So there’s a lot of fascinating technology that’s really useful around the coin space. I think what people wrestle with is, you know, if you think of what Bitcoin itself is or Ethereum or pick your favorite flavor of coin n number one, the fact that there are literally thousands of coins tell you it’s not that hard to get into the making a coin business, right? but the technology behind something like Ethereum is what has real value. So I, I feel like the, the, the price of Bitcoin is as good as the sentiment around whether people think it’s a store of value or not. I’m not sure that, I think that it is, I don’t know if I think it’s a pet rock, that’s an interesting analogy, but I think there’s a lot of value in the technology that’s behind it and, and ways to use it that we haven’t even begun to really explore. And the interesting thing is be behind the story of Bitcoin is, you know, they’re somewhere in the neighborhood of two to 3 trillion a day of financial transactions that take place using blockchain technology. So it’s, that has nothing to do with Bitcoin, but it has to do with the technology. So it’s definitely making its way into the financial system and into everybody’s lives

Richie Burke:
And, and a lot, a lot on Ethereum’s technology too,

Brian Andrew:
Right? Yeah, right. A lot of that has to do with their blockchain technology.

Richie Burke:
I wanna touch on this. In a recent article, one of your colleagues, Brian Schaffer said, quote, from long-term investors, looking forward, the multi-year setup is as attractive as it has been in years, higher starting yields and lower stock valuations mean that stocks and bonds have potential to deliver long-term returns, more in line with historic val historic averages. Does this essentially touch on what you were saying earlier of, hey, things may seem somewhat bleak now, but this is a good time to not hold back?

Brian Andrew:
Yeah, I, I think you know, interest rates is a good place to start because they are substantially higher than they were a year ago. You know, a year ago, a five-year treasury had a yield of less than half a percent. Today it has a yield closer to 4%. Well, I, you know, I can make money at 4%. I can’t really make a whole lot of money at a half a percent. So on the bond side, things have more value. And from a stock perspective, you, you know, I wouldn’t say the market is cheap. I don’t think that would be a fair statement. but it’s a lot cheaper than it was a year ago. And if you think about Apple’s probably a good example, or pick your favorite technology company, that might be down 30 to 60%. more than likely a company like that that’s producing tens of billions in free cash flow and has a product in almost everybody’s back pocket that they’ve learned how to monetize. I mean, that, that company’s gonna be okay. And it’s a lot cheaper today than it was a year ago.

Richie Burke:
Gonna be around for a while.

Brian Andrew:
Think so?

Richie Burke:
Yeah, I think so, one other thing I wanted to touch on, a lot of what you guys talk about is, as far as individual portfolios go, having complementary strategies, do you want to touch on some of the strategies that you guys recommend at JFG?

Brian Andrew:
Yeah, I think one of the things that we’ve talked a lot about in the last couple years and we’ll continue to spend time on, is that when we talk about complimentary strategies, it really means strategies that are available to people outside of the public market. So most of us are familiar with, we just talked about Apple, but we can buy Apple stock, that’s a public company. but there’s a lot of money in the private equity market and there are a lot of ways that private markets are becoming more accessible to the public. and so there’s value in being a private investor, private equity investor, a venture capital investor, whatever stage you might be interested in based on how much risk you want to take, because those markets don’t price every day. they’re less liquid, but you get paid for having less liquidity.
and so it makes sense to have some money invested. And one way to think about it is, if you’re someone who loves real estate and you own a home and you buy two income-producing properties, now you’re a real estate investor in something that’s pretty illiquid, produces some free cash flow and changes the nature of your investments. So as a buyer of real estate, when interest rates go up, what happens to real estate prices? They go down. So maybe that’s, if that’s something you’re interested in, then you’re buying a cheaper asset in a private market and the value is better because it’s illiquid and you get paid for that illiquidity. So that’s just one example. But whether it’s private equity or private credit, private real estate there are a lot of ways to invest in private markets and get paid a for being in a private market versus a public market. So we think it makes sense to do that.

Richie Burke:
Absolutely. Anything else that people should be aware of heading into 2023?

Brian Andrew:
Yeah, I, I think the most interesting thing this year is gonna be what, where we started, which is the whole debate about a recession. and I think what, what you have to be careful about, especially if people begin to worry more about the recession being deeper that would likely mean prices, stock prices in particular would go lower. And, and again, instead of being fearful about stock prices going lower, be thoughtful about looking for opportunities. You know, finding that place that you’re passionate about and looking for something that’s 20 or 30 or 40% less expensive than it was last year or today. those are the places you want to be making investments.

Richie Burke:
Thanks so much for coming on today. It was good talking to you again.

Brian Andrew:
Yeah, thank you. I appreciate it. It’s great talking to you.

Richie Burke:
Thank you to Brian Andrew, chief Investment Officer at Johnson Financial Group for joining us for this episode of the GoGedders podcast. And thank you for tuning in. We’ve got some big announcements coming up for 2023 for the podcast that will be announcing about a week from this episode release date. So they may already have been announced depending on when you’re listening to this. So make sure to stay tuned for those. And if you got any value out of this episode, please share with your friends and a writer review that helps the podcast. Thanks again for tuning in.