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Monthly Economic and Investment Outlook

January 2023 Economic and Investment Outlook

United States

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  • The Bloomberg monthly survey of 38 economists noted that the probability of a 2023 recession climbed to 70% in December 2022.
  • The Consumer Price Index (CPI) rose 6.5% y/y in December last year, a slowdown from 7.1% the previous month. Overall, inflation has decelerated for six consecutive months on a y/y basis since hitting a peak around 9% in June. Core CPI registered 5.7% y/y. The slowdown in inflation was driven by lower food, energy, and used car prices. Average Hourly Earnings rose 0.3% m/m and are up 4.6% over the past 12 months.
  • The elevated positive spread between the Conference Board Present Situation Index and the Expectation Index indicates that consumers feel much better about the current environment relative to the future. At these levels, history suggests a high risk of a recession, if not significant deterioration in economic growth.

    Recession Cnnsumer

  • Economic activity in the manufacturing sector contracted for the second consecutive month in December with the Manufacturing-PMI falling 0.6% to 48.4% from 49% the previous month. New Orders Index remained in contraction territory at 45.2%, the Production Index fell into contraction territory at 48.5%, and the Prices index fell 3.6 percentage points to 39.4%. However, the Employment Index returned to expansion territory (52.4%, up 3 percentage points).

    US Mfg PMI 

  • The labor market remained tight as 223k nonfarm payroll jobs were created in December and the unemployment rate dropped to 3.5%, a 54-year low. Average hourly earnings (AHE) dropped to 4.6% y/y, a sign that wage growth is gradually decelerating. The average weekly hours worked fell to 34.3 hours as employers manage labor costs.

Global

  • The last twelve months have seen a persistent lowering of global GDP growth. However, growth remains positive.

    Consensus GDP Forecasts 

  • The S&P 500 Global Manufacturing Purchasing Managers Index (PMI) for December was unrevised in its final release, confirming a sharper-then-expected slowdown to close out 2022. The headline PMI was unchanged at a 30-month low of 46.2%, a third consecutive monthly decline and the seventh in the last eight months.
  • China’s official Manufacturing Purchasing Managers Index (PMI) for December fell to 47%, and the Nonmanufacturing PMI tumbled to 41.6%. Every component of the Manufacturing PMI was below 50%: new orders (43.9%), employment (44.8%), and output (44.6%).
  • Perhaps China’s reopening and unwinding of their zero-Covid policy could help boost global growth later in 2023. However, though this reopening could be choppy, it may well put upward pressure on global oil and other commodity prices, and potentially slow the descent of inflation.
  • Japan recently reported its worst real wage decline in more than eight years. November was the 8th straight month to show an annual fall in real wages, which were undercut by inflation. The 3.8% fall in real wages was the greatest since a 4.1% drop in May 2014. Japan’s CPI was 4.5% y/y in November, the quickest pace of increase since June 1981.
  • The Eurozone’s flash headline CPI fell more-than-expected in December to 9.2%. Falling energy prices helped, as did government subsidies. According to Bloomberg, the decline in headline inflation was entirely driven by a sharp drop in energy contributions. Energy bills were lowered substantially by the impact of a one-time support measure put in place by the German government – whereby part of household’s gas bills for December were covered by fiscal handouts.
  • According to the World Bank, global growth is likely to rise 1.7% in 2023, down from an earlier forecast just six months ago of 3%. Odds of a recession in the U.S. and Europe are on the rise.

Fixed Income

  • In December 2022, the Federal Open Market Committee (FOMC) raised the target range for the fed-funds rate by 50 basis points (bps) to 4.25% to 4.5%, as widely expected. Cumulative rate hikes in 2022 totaled 425bps, the most since 1980. The Fed now estimates the terminal rate to be 5.25%, implying additional rate hikes of 75bps in 2023. It is unlikely the Fed will pivot to easier monetary policy until it is convinced that the fed-funds rate is positive in real terms and the labor market is cooling.

    Fed Funds Target Rate 

  • The Fed expects 4.6% unemployment by year-end 2023, a rise of 0.9 percentage points, an increase that has never occurred without the economy falling into a recession. Currently, 158 million Americans are employed. An increase in the unemployment rate to 4.6 % implies 1.54 million jobs will be lost. Additionally, anytime the Fed has hiked rates into a background of food and energy inflation, a recession has followed.
  • Should a recession emerge in 2023, it will be caused by the Fed’s aggressive tightening cycle and the associated drag from tighter financial conditions (increase in fed-funds rate, decline in money supply growth (M2), and Quantitative Tightening).
  • Both federal and state fiscal policy, particularly, stimulative excess transfer payments, is in part offsetting the Fed’s tightening efforts, and risks forcing the fed-funds rate to go even higher for longer than expected.
  • Whether the Fed alters its policy course relative to its projections will depend on the path of inflation, and more importantly on the direction of services inflation, which will be determined by the strength or weakness in the labor market.

Tactical Fixed Income Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, defensive, and strong cash flow characteristics.
  • Underweight to International Developed with no exposure to Emerging Markets. Although valuations remain attractive relative to U.S. equities, these asset classes may be pressured by slowing global growth and the strength of the U.S. dollar.
  • Slight exposure to gold in an environment of high inflation, negative real interest rates, and geopolitical tensions.

Equity

  • For the year, the Dow Jones Industrial Average and the S&P 500 dropped 8.8% and 19.4%, respectively, while the Nasdaq tumbled 33.1%. The drops for all three indexes were the worst since 2008.

    2022 was the year that contracting valuation multiples caused the bear market in stocks while earnings held up surprisingly well. Stock performance in 2023 will be driven more by earnings, and less so by valuation multiples.

    Percentage Change S&P 

  • According to Strategas, there have been 11 instances since 1950 that saw S&P 500 earnings decline by more than 10%. Only two of those instances resulted in a negative return for the S&P 500 that year.

    Annual S&P 500 Earnings Growth 

  • According to Dow Jones Market Data, since 1929 the S&P 500 Index has risen 75% of the time, with an average gain of 11.9% for the year, when the first five trading days finished in positive territory. No real predictive advantage when the index falls during the first five days of trading.
  • The stock market discounts the future by about 12 months. So, by the end of 2023, the prospects for the economy and earnings should be stronger than they are today. In other words, the outlook for 2024 will matter more and more, while 2023’s outcome will matter less and less as the year progresses.

Tactical Equity Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, defensive, and strong cash flow characteristics.
  • Underweight to International Developed with no exposure to Emerging Markets. Although valuations remain attractive relative to U.S. equities, these asset classes may be pressured by slowing global growth and the strength of the U.S. dollar.
  • Slight exposure to gold in an environment of high inflation, negative real interest rates, and geopolitical tensions.
Notices & Disclosures
Past performance is no guarantee of future results. Products and services offered through F.N.B. Investment Advisors, Inc. are not FDIC insured; and are not insured by any Federal Government Agency, are not deposits or obligations of or guaranteed by First National Bank of Pennsylvania or its affiliates and may go down in value. The material has been extracted from various sources that F.N.B. Investment Advisors, Inc. believes reliable, but we cannot guarantee the accuracy or integrity of the material. This material is for your private information, and we are not soliciting any action based upon it. Any projections, market outlooks or estimates contained herein are forward-looking statements and are based upon certain assumptions. Other events that were not considered may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with their investment advisor. You can review your registered investment advisors or the investment advisory firm at the SEC's Investment Adviser Public Disclosure page - http://www.adviserinfo.sec.gov/IAPD/Default.aspx.

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