Navigating the Whirlwind: Financial and Political Factors Shaping 2023

^{Written by: Trek Investment Committee}

From looming government shutdowns to resilient economic indicators, we explore the volatile terrain investors should watch as we approach year-end.

As we continue to navigate 2023, we face a set of compelling developments. One immediate concern is the hovering possibility of government shutdown unless Congress approves a spending bill by month-end. Such political brinkmanship rarely fosters stability in the investment world. Beyond this, multiple factors point towards a potentially more turbulent latter half of the year, contrasting with the relative stability experienced earlier in the year. ¹

Entering this year, a heightened risk of recession loomed large – fueled by rapidly rising interest rates and significant stock market fluctuations. Yet, as we approach year-end, a recession has not materialized, and current indicators suggest one is unlikely for 2023. Nevertheless, the financial landscape remains uncertain. Primary among these uncertainties is the prospect of resurgent inflation, compelling the Federal Reserve to continue its interest rate hikes. ²

Short term, investors generally benefit when a recession is averted, given that economic downturns often trigger sharp declines in the stock market. So why has 2023 defied recessionary forecasts? The answer lies largely in a resilient job market, which boasts a current unemployment rate of just 3.8% – historically low. ³

The strength of the consumer sector also plays an important role. In our consumer-driven economy, gainful employment and steady income typically lead to robust consumer spending, helping to fortify economic health. So far this year, consumer spending has remained stable, facilitated by sufficient personal income to absorb rising costs in food and housing. However, should corporations grow increasingly cautious due to escalating costs and credit rates, the risk of an economic downturn could intensify. ⁴

Yet consumer behavior tells only part of the story. Another key factor underpinning our economy’s resilience in early 2023 has been elevated government deficit spending, despite declining tax revenues. This fiscal approach has served as an economic stabilizer, with government spending this fiscal year up by 10% compared to the previous year. ⁵

Of course, increased government spending is not without its trade-offs, including rising debt payments. Such concerns can become contentious political issues, particularly when spending priorities diverge along party lines – a situation exacerbated in a presidential election year like the one to come. Thus, political developments warrant scrutiny, especially given their potential to influence economic trends and market behaviors.

While economically, we don’t foresee a recession unfolding in 2023, we do anticipate heightened volatility in both the stock and bond markets in the coming months. As such, it may be a good time to review your investment strategy carefully and thoroughly with your financial advisor, particularly as we enter the next phase in both the economic cycle and political landscape.