Market outlook: equities have continued to shine, but macro challenges remain
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Financial markets served up more plot twists than a complex murder mystery in the first eight months of 2023. We take a closer look at what the coming quarter could bring.
From the U.S. debt ceiling to the regional banking crisis, 2023 is likely to be remembered as anything but uneventful. Even then, uncertainty remains high: Contagion fears relating to fresh signs of weakness in Mainland China’s property sector continue to linger and it’s still unclear when the U.S. Federal Reserve (as well as its peers) will exit wait-and-see mode and hit pause on interest-rate hikes.
Despite the ambiguity that has more or less defined the trading environment, financial markets—particularly equities, and specifically, U.S. stocks—have done well year to date, exceeding expectations. That said, whether this positive streak could continue is anyone’s guess.
Unsurprisingly, the debate within our team continues to be lively and constructive. The bulk of our discussion, however, centers on three key points.
1 Recession postponed, not canceled
Our macro view hasn’t changed: While most economies have avoided a recession so far, we’re of the view that a contraction will occur in many parts of the world over the next 12 months. Broadly benign financial conditions and the rotation of consumer spending from goods to services (supported in part by the continued drawdown of excess savings accumulated during the pandemic) have underpinned growth, but we expect many of these tailwinds to start to dissipate as the lagged effects of cumulative rate hikes begin to affect the real economy.
We expect major economies to slip into a recession in the latter part of 2023 and early 2024; that is our baseline view. While we can foresee a scenario where the actual contraction turns out to be shallow and relatively brief, our base case is that a technical recession is the most likely outcome.
2 The stock market is not the economy
Is the stock market an indicator of where an economy would be in a few months? While there may be a correlation between stock market performance and economic strength, the stock market is not the economy. This explains why U.S. equities have been trending higher, supported by a healthy earnings picture, price momentum, and optimism about the artificial intelligence sector while forward-looking economic indicators flashed red. It also explains why we’ve retained our overweight stance to equities at this point. That said, we’re keeping an eye on the macro environment and will be prepared to change our views once evidence of an imminent economic slowdown mounts.
3 The great reopening in Mainland China that wasn’t
The third theme that has sparked much discussion within our team has to do with Mainland China’s economic performance since its reopening at the start of the year. Investors had expected 2023 to be a banner year for the Chinese economy, having assumed that the reopening would unleash pent-up consumer demand and boost growth. Unfortunately, the scenario didn’t play out as uncertainty relating to the country’s property sector kept a lid on consumer spending. In addition, the widely hoped-for large-scale stimulus package didn’t materialize. Analysts have been downgrading their growth forecasts for Mainland China this year on the back of a string of weaker-than-expected economic data. Unfortunately, the absence of a strong rebound in Mainland China is likely to be felt in Asia and Europe, and potentially, the broader global economy.
Uncertainty continues
In all likelihood, uncertainty surrounding Mainland China, the pace at which monetary policy evolves, and geopolitics will continue to drive market sentiment—and by extension, asset returns—going forward. While such an environment implies that a degree of caution is warranted, it doesn’t preclude the scope for upside surprises and opportunities. That said, the volatile trading environment has reinforced a tilt toward more defensive and higher-quality assets—at least for now.
Model inputs are factors in Manulife Investment Management research and are not meant as predictions for any particular asset class, mutual fund, or investment vehicle. To initiate the investment process, the multi-asset solutions team formulates five-year, forward-looking risk and return expectations, developed through a variety of quantitative modeling techniques and complemented with qualitative and fundamental insight; assumptions are then adjusted for economic cycles and growth trend rates. The charts shown here may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and are only as current as of the date indicated. There is no assurance that such events will occur, and if they were to occur, the result may be significantly different from that shown here.
The information in this material, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.
This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy. It is not possible to invest directly in an index. Past performance does not guarantee future results.
Model inputs are factors in Manulife Investment Management research and are not meant as predictions for any particular asset class, mutual fund, or investment vehicle. To initiate the investment process, the multi-asset solutions team formulates five-year, forward-looking risk and return expectations, developed through a variety of quantitative modeling techniques and complemented with qualitative and fundamental insight; assumptions are then adjusted for economic cycles and growth trend rates. The charts shown here may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and are only as current as of the date indicated. There is no assurance that such events will occur, and if they were to occur, the result may be significantly different from that shown here.
The information in this material, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.
This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy. It is not possible to invest directly in an index. Past performance does not guarantee future results.
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