Fourth-quarter 2022 economic outlook with Jim Solloway

- Hi, I'm Kathy Oldfield, Client Portfolio Manager at SEI. Today, I'm here with Chief Market Strategist and Senior Portfolio Manager, Jim Solloway, who will be presenting our economic outlook for 2023. Jim, as you noted in your commentary, most of us are happy to see 2022 come to a close. But it doesn't sound like you expect 2023 to bring much in the way of good news.

- Thanks, Kathy. It's true that for 2023, we are anticipating a less robust global economy than the one we witnessed in the past year. Stagnation is probably the best word for it.

- Stagnant growth and high inflation. Does that mean we should expect a recession in the US?

- The word recession almost certainly will apply in some countries and regions. Growth in most major industrial economies is lackluster. Gross domestic product gains in the US and Canada have generally led the pack since 2010, although the US struggled this past year. Germany and France eked out modest gains, but, like the United Kingdom, overall business activity is barely above their pre-pandemic peaks. Japan remains below its 2019 high watermark. It is not at all clear to us whether the US will fall into recession in 2023, although surveys of economists published by the Federal Reserve Bank of Philadelphia, "The Wall Street Journal", and the National Association of Business Economics all suggest a greater than 50% chance. It's unusual for economists to be so bearish. We're only half-joking when we say that this is the most anticipated recession in the history of recessions.

- In 2022, we had inflation, COVID-19, war in Ukraine, and rising interest rates. Will those same factors be driving the narrative in the new year?

- Investors will certainly be facing some familiar headwinds: inflation rates exceeding the targets of major central banks, interest rate increases potentially continuing throughout the first half of the year, quantitative easing shifting to quantitative tightening, and for many countries stagnant or recessionary economies through 2023 and perhaps into 2024. On the geopolitical front, the war in Ukraine and the energy crisis that it created will be with us for years to come. While oil and gasoline prices attract a lot of attention, natural gas is also a concern. The wholesale price of natural gas in both the Eurozone and the UK have tumbled recently, thanks to unusually mild weather and currently ample inventories. As winter progresses, though, inventories will be drawn down to heat homes and businesses. We believe the 2023 to 2024 heating season will prove even more challenging than 2022, given the near total absence of Russian natural gas supplies in the global marketplace. Energy prices are likely to remain extraordinarily volatile, dependent on a combination of geopolitics, weather, and economic conditions. If China's economy comes out of its zero COVID-19 doldrums as we expect, the challenge could become even greater since the Europeans will face a major source of competition for limited supplies of both oil and liquified natural gas.

- The challenges with energy prices support your view that central banks will have their work cut out for them in their efforts to tame inflation. Should investors brace themselves for a repeat of 2022?

- While we expect inflation to linger, we do think that it has peaked. We would like to see it decelerate back towards central banks' 2% target, but tight labor markets in the major economies suggest that it'll take a long time for that to occur.

- There are certainly more than enough challenges on the horizon. Can you sum up your outlook on what investors should expect to see in the financial markets?

- We believe the extent of any additional deterioration in stock and bond prices from current levels should be tempered due to the price correction that has already occurred over the past year. Valuations also have returned to historical norms for the most part. Bonds, for example, should provide the diversifying benefits expected from a balanced portfolio, something that was notably missing in 2022. The low equity multiples already applied to the earnings of many markets outside the US should also provide a buffer for equity prices, even against the backdrop of the harsher economic conditions we expect to prevail in places such as Europe versus that of the US. In summary, investors should be prepared for more volatility as the global economy works through its various challenges.

- Thanks, Jim. We always appreciate your insights. Read our latest economic outlook for more of SEI's insights.