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In our recently released 2023 Capital Markets Forecast, Chief Investment Officer Tony Roth and members of his team examine the determinative catalysts for the 2023 market and economic outlook. Where have all the workers gone? What are the critical tipping points and risks around China’s polices? And how is the transition to green energy linked to rising prices? Hear the answers to those questions, and how they are positioning client portfolios in light of the current realities.

Episode 64: 2023 Capital Markets Forecast: Tipping Points, Challenges, and Opportunities Ahead

Tony Roth, Chief Investment Officer, Wilmington Trust Investment Advisors

Meghan Shue, Head of Investment Strategy, Wilmington Trust Investment Advisors

Luke Tilley, Chief Economist, Wilmington Trust Investment Advisors

Rhea Thomas, Senior Economist, Wilmington Trust Investment Advisors

TONY ROTH: Welcome to Capital Considerations. This is Tony Roth, Chief Investment Officer at Wilmington Trust. We have a great episode today and perhaps our most important episode of the year because we’re going to deliver, along with my colleagues, our forecast for 2023, our Annual Capital Market Forecast. 

I'm joined today by our Chief Economist, Luke Tilley; our Head of Investment of Strategy, Meghan Shue; and Senior Economist, Rhea Thomas. And we’re going to talk today about the Inflationary Vortex, which is the title of our Capital Market Forecast for 2023, the inflationary vortex that we’re all living, that we’re all experiencing, that has beset not only our economy, but the world. And we’re going to talk about three particular dimensions of the world that are, in our opinion, going to be critical in understanding the trajectory of inflation going forward. 

So, when we think about what caused inflation, clearly there are two very powerful forces. One was stimulus that came in during the pandemic, fiscal stimulus of record amounts. Over $4 trillion spent1 in order to, if you will, rescue the economy during the pandemic, coupled with monetary stimulus which created significant financial asset inflation, very loose monetary conditions all from the form of zero fed fund rates, zero to 25 basis point fed fund rates for a period of time. And they were coupled with the problems that we experienced on the supply-chain side with China locking down and then ultimately the war in Ukraine and Russia that has caused all kinds of havoc in the hydrocarbon supply chain. 

But when we think about where inflation is going, going forward, what we have to think about very specifically in a context where the stimulus is gone. The fiscal stimulus is gone, the monetary stimulus with Fed funds now at, I believe, 4.25% approximately, and we do have some continued supply-chain problems but certainly less than we did. There are really three very distinctive forces, in our view, that are going to define the future for inflation.

The first is labor. There’s been some very dramatic changes to the labor market that actually started before the pandemic to some degree but were really accelerated by the pandemic, which has caused wages to be inflationary and we think that is a trend that’s going to be hard to mitigate going forward. 

Secondly is China. There are some very profound socioeconomic developments that are happening in China that dovetail with some more immediate problems that China has around exiting Zero COVID and those will come together to create a very different contribution from China around inflation.

And the last is energy. We have a big problem on our hands in this—on this planet. We've got to get away from hydrocarbons, but we’re very concerned that the move away from hydrocarbons will not happen in a way that is smooth and that what we call tenuous transition is likely to result in some pretty significant input inflation as it relates to energy across the entire economy and the entire world.

And, Luke, I think to start, a place to start is very specifically with the outlook for next year. We have for some time been focused on the idea of a soft landing and that we thought that because the consumer is so strong, the labor market’s so strong, the Fed would be able to sort of arrest this inflation to a large degree without putting us into a recession. 

Now, we’ve recently changed our view. We still think that that soft landing is very possible, but that the most likely scenario now is a, probably a modest recession next year. Can you talk to us about how the current path of inflation is likely to bring us to that result and what would you look for as we move forward in coming months to tell us which way it’s going to break between a soft landing and a recession?

LUKE TILLEY: Yeah, Tony. I think it’s, it really keys in on the things that you mentioned at the beginning, sort of the inflation that got us here is not the same kind of things that we’re watching going forward, because we have seen, continue to see, really encouraging price decelerations and even price declines in a lot of the goods that were driven up by the stimulus. So, a lot of the things that we sort of as a nation, as a world bought during the pandemic like computers and sports equipment, iPads, phones, those have started to come down in price and that has been encouraging. But the challenges going forward are very much about those things that you listed and that we’re looking at as we go forward in 2023, like energy, definitely labor, and also the cost of internationally produced goods.

So, when we bring it together, we have been encouraged by those declines in goods prices. But when we look at labor, the challenges there in wages and just what an important part that is for the services, that’s where we see the risk of inflation staying higher than the Fed is comfortable with and them needing to press on the brake pedal hard enough that they feel comfortable that inflation won’t get entrenched. And that just continues to raise the risk of recession, because that’s really what they want to guard against is this going on for years. So, they’re willing to cause that recession if needed and we just haven’t seen the slowdown in services prices yet. 

TONY ROTH: So, at the outset of the conversation today, I looked up and I saw you and Rhea and I said, wow, I'm really outmatched, two economists here. But now I feel very happy we’ve got two economists because we really have to go deep on this. 

So, Rhea, when we think about this problem around labor and the fact that we talk about this thing called the participation rate, which basically means what percentage of the people in this country either have a job or want to work, they’re looking for a job. And that absolute number and that percentage is really a lot lower than we want it to be. It’s a lot lower than it was before the pandemic. And is that, from a supply/demand standpoint, that lack of supply for workers, which is causing wages to go up? 

And Luke talks about—what was the word you used, Luke? Wages being persistent or being entrenched. 

LUKE TILLEY: Yeah. Well, inflation becoming entrenched.

TONY ROTH: Right. So maybe it is already. Maybe wages are already stuck, if you will, in this upwards spiral. Let's start, Rhea, with understanding why is it that we don’t have enough workers?

RHEA THOMAS: Sure. as you mentioned, a lot of this elevated wage pressure is being caused by labor force tightness and that refers to the fact that businesses really can’t find enough workers to hire. Essentially, the demand for labor is too high and the supply of labor is too low. The Fed can help ease that imbalance by raising rates to lower demand. But its tools are really not effective in addressing the supply issues. 

And in our view, there are two key drivers of that low labor supply. One of them, as you mentioned, is that low labor force participation rate, which is roughly a percentage point lower than where it was pre-pandemic right now and, as a result, we have fewer available workers. And the second factor that we think is driving some of that low labor supply is the fact that we have less engaged workers and that results in fewer productive hours worked.

TONY ROTH: Okay. So 1% doesn’t sound like a lot, but 1% of 30—300 million people is three million people. That actually on the margin makes quite a difference in how much companies have to pay in order to get, whether they’re productive or unproductive, whether to get people, at least warm bodies in the chairs, right?

RHEA THOMAS: That's exactly right. As you mentioned, our estimate of the shortfall in labor supply relative to pre-pandemic trends is about three million workers. We think the largest driver of that is accelerated retirements, accounting for over a third of those, of that shortage. And we do estimate that those workers are probably less likely to return. Many of them left the labor force because of the elevated health risks. And then, they also may have left because their household balance sheets were benefiting in the wake of the pandemic with the stronger housing market as well as elevated equity markets. 

TONY ROTH: Okay. So, what’s the other roughly two-thirds?

RHEA THOMAS: The other important driver, in our view, is coming from slower population growth and that’s largely driven by immigration and that is going to be driven by policy going forward. If you look at immigration, actually even into the runup to the pandemic we’d already seen a slowing pace. We had about 1.1 million immigrants coming into the workforce on average in the prior 10 years to the pandemic.2

TONY ROTH: That's per year. 

RHEA THOMAS: Per year. But that collapsed to about 350,000 in 2020 and 2021. Now that’s expected to recover gradually over time in the next 30 years, but only to a pace that’s about 17% lower than where it was pre-pandemic.3 So, that is going to contribute a major shortfall in our labor force going forward.

TONY ROTH: I want to just take a moment also to talk about this other phenomenon, it seems like it’s sort of a two-sided dynamic, right, which is this quiet quitters, the change in attitude towards work, because on the one hand it means that we’re less productive. But on the other hand, to me it almost provides some level of reassurance that as we move forward maybe there is some potential for the economy to get more productive because we’ve lost some productivity with these poor attitudes, these slackers. But over time as the balance changes and companies are able to exert more leverage over workers, there’s some real latent potential to come back out and sort of reverse what we’re losing now perhaps. So, anyway, what do you think about this whole productivity and this thing or these errant attitudes that we see?

RHEA THOMAS: Sure. That's a great point, Tony. And, you know, recent polls suggest about 50% of the workforce is accounted for by quiet quitters4, those that are sort of either actively engaged nor actively disengaged. But as you say, over time if those workers become reengaged that could give us some sort of low-hanging fruit to take advantage of in terms of increased productivity.

And if you look at the recent polls, they also suggest that about 65% of workers believe that they could get a job with higher pay.5  So, as the dynamics of the labor market change, if we do move towards that mild recession scenario, worker bargaining power may start to erode and that could lead to workers maybe deciding that they need to get engaged in order to keep their jobs. 

TONY ROTH: That would be good.  What I think is really important too to understand is as we transition to the second theme, which is China socioeconomic evolution, is the common denominator of labor, right? Labor market is labor. The situation in China all has to do with labor as well, right, Meghan? 

MEGHAN SHUE: Yeah, absolutely. Thank you, Tony. I think what’s so interesting is as we look over the past two decades China’s influence, in large part because of its growing labor base, has been such an important disinflationary force on the global economy. And if you look between 2001 and today, in 2001 China was accepted into the World Trade Organization6 and that was really a pivotal point when China really became much more integrated into the global economy, the global supply chain. Since then, China’s economy has grown 13 times and its manufacturing labor base has doubled to 25 million people.7

So, as we look going forward, you know, between the last 20 years and the next 20 years, we think that there’s a real shift and that has, in our view, come about around the ascension of President Xi to President of China and the, really the change in the dynamics from wanting China to be such a global player and a globally integrated player in the supply chain, willing to be manufacturer to the world to really wanting to be a leader in different parts of the economy and what that means for policies going forward. 

TONY ROTH: They were a leader. They are still today a leader in manufacturing. I mean all the Apple’s iPhones are made in China for the most part. They’re the most sophisticated pieces of electronics probably ever produced. So, what is this leadership that they’re looking for and why is it happening now?

MEGHAN SHUE: Well, over the past 20 or so years, China’s leadership has really been in the manufacturing space. And the way I would think about it is executing on the designs of other firms, many of them U.S.-domiciled. But going forward, China does not want to be just the manufacturer. They want to be the designer and the leader and the innovator in the next wave of technology, whether that’s green tech, artificial intelligence, and really setting themselves apart to not only execute on other, you know, companies’ or countries’ designs, but to really be a—leader and an innovator in those spaces. And what that will do is that will, if successful, help to elevate not only China’s place geopolitically, which is a bit of a separate conversation, but also economically, elevating the middle class, raising wages, and creating a more stable economy, which is really, I think, China’s end goal. 

TONY ROTH: Well, it really resonates because it has clear echoes of the evolution of our country, as well as many others, where if you think back to post-war era, in the ‘50s we were very manufacturing-dominant and manufacturing-based. And by switching those jobs over to service jobs using this paradigm from manufacturing to design let’s say, but much more broadly to a service economy, those service jobs are more sophisticated, more highly compensated roles. 

And so, now China is at that stage where their middle class wants more than what comes with manufacturing and they're looking for these higher-quality jobs. Their educational systems have moved along in kind and they’re seeking to really make this shift. How easy will it be for them to do this? In other words, if they’re going to take these manufacturing jobs offline, they’re going to have to replace them with other, more attractive jobs. And I sort of see this deglobalization as sort of a threat at the same time to Chinese leadership globally, not just from a moral standpoint, but also from an economic standpoint. It seems like it’s going to be harder for them to sort of garner, whether it’s legal or illegal appropriation in learning or whether it’s stealing intellectual property. But it feels like as they disengage it may be harder for them to create this society that’s not based on manufacturing. Do you think that’s going to be easy?

MEGHAN SHUE: I don’t think it will be easy. And really, essentially what China is trying to do is escape the, what they call the middle-income trap. So, they’ve already made great progress really from moving from an agricultural economy to a manufacturing economy. But taking that next step is more challenging.

There, there’s a policy that they’re trying to engage in what they’re calling dual-circulation. So, it essentially means keeping one foot in both sides of the door, if you will. So, maintaining an export leadership role in the global economy while also trying to shift towards consumptions and services, which again does elevate living standards and wages and, importantly, reduces some of the cyclicality of China’s economy which is, a services consumption-led economy tends to be more stable, more insular. It’s one of the benefits that we have in the United States. 

But it is a challenging proposal, if you will. And I think what makes it harder is that when other countries have successfully done this, it’s been in a little bit more of an open, globalization type of approach. And now, going forward with technology-related tensions as high as they are and, you know, many countries who are leaders in the space really raising the walls, if you will, to protect their intellectual property and not share that, I think that makes it harder for China to make that leap towards being an innovator in these very, very high-end parts of the technology space.

TONY ROTH: So, this whole organic path that China’s on is really one that starts to redirect this idea that they’re a unlimited source of cheap labor. And I use that word organic intentionally to offset it against the idea that we’re not even getting into the potential for inorganic interruption, which could be more geopolitical stress over Taiwan and so forth. Even just starting to have real stress in the Taiwan Strait where so much of the global trade passes could potentially cause significant increases in costs for supply chain as it redirects activity away from that part of the world. 

MEGHAN SHUE: That's right. I think at the most benign, the tensions around Taiwan and technology leadership more broadly are going to lead to duplicated supply chains, difficulty in innovation. But there’s a significant risk as it relates to semiconductors and the chips space. Almost all of the artificial intelligence chips used by the Chinese military were designed by U.S. firms, which I think helps to explain why in a very, very fractured U.S. political environment this is one of those issues that gets a lot of uniquely bipartisan support for being really tough and thoughtful around what we’re sharing with China.

China and the U.S. are both hugely reliant on Taiwan for manufacturing anywhere from 70 to 90% of the chips that both countries use. And then, on top of that you have quite a bit of trade that’s flowing through the Taiwan Strait and the South China Sea. So, you could see how a scenario, not necessarily a near-term prediction, but one that’s out there that we have to think about could really reinvigorate the supply-chain disruptions that we saw during COVID. 

TONY ROTH: So, let’s get to our third theme, which is energy’s tenuous transition. We really sort of wrestled with the right word to characterize this big shift in energy and we came up with this word tenuous. What does that mean? Why do we have this word tenuous in there? Luke, what does it denote?

LUKE TILLEY: Yeah. This is one of those real big challenges going forward. And in the CMF, we liken this to the passing of a baton from one runner to another on a track. Because, as you said at the start, we’ve got this energy issue and the world’s need and desire to move away from hydrocarbons, fossil fuels, and pass that baton to the renewable energy sector. And it’s a very challenging thing to do and the reason that we say tenuous is we expect there to be challenges.

And what we’ve seen as global governments’ policies have pointed more and more that it was going to move this direction is that oil companies, the large oil majors, have reacted as you would expect they would. These are companies that have to lay out billions of dollars of [capital expenditures] capex just to find and prove the existence of oil reserves and then it takes several more years and even more money to develop them even before getting them out of the ground. And if you see on the horizon challenges to that, then the rational thing to do is to cut back.

And what we’ve seen is a decline that kind of capex. So, we show that there’s been a about 50% decline in capex by the oil majors starting in 2013 all the way through 20218 and essentially that the first part of that tenuous transition are the challenges that go along with this lack of capex, the long pendulum swing that’s going to come from that. And after pretty consistently over years seeing the large oil majors increase their total amount of proven reserves that they have to tap, that sort of flatlined at the tail end of that timeframe. You get to 2018 to 2021 and the level of proven reserves has, like I said, flatlined and it’s really hard to restart that. It really is a long horizon thing, that continuous capex that has now fallen.

TONY ROTH: At this point, all of the major constituents across the political spectrum here in the United States believe that climate change is manmade and that it, carbon dioxide is, you know, really the primary offender within that. And we have the cost curve right now for solar is below natural gas. The cost curve for wind is below natural gas.

So, why do we want any more hydrocarbons? 

LUKE TILLEY: Yeah. None of us here are arguing against the value or sort of, you know, the normative question of whether this should or should not be done. That's why we labeled it the tenuous transition. The transition to that new world is very challenging.

And as you said at the top, what we’re thinking mostly about is inflation. So, we’re looking at the forecast from the International Energy Agency and we see a lot of that transition that you’re talking about. The share of energy provided by renewables was just 12% in 2021.9

TONY ROTH: This is globally?

LUKE TILLEY: This is globally, yeah.


LUKE TILLEY: So, the share of renewables, energy production, 12% in 2021 and then it rises steadily. In 2030, it rises up to 17% and then in 2050 all the way up to 29%.10 So, it goes from essentially a tenth of energy supply all the way up to a third over the course of the next 30 years.  However—

TONY ROTH: Why so slow?

LUKE TILLEY: Takes a long time. It takes a long time to build all of this kind of stuff out, the technology. You know, like you said, the cost curve is there, and we’ll talk, I know, in a minute about some of the commodities and some of the issues there. But it takes a long time.

You’ve got a lot of existing plants that would have to be, you know, retired before the end of life. But as we still talk about the petroleum side, in those exact same forecasts oil drops only 2%. It currently provides 29% of global energy and it only drops to 27%.11

So, we’re in a world where the suppliers of the stuff have cut back on trying to find it and trying to develop it, but it’s still forecast to be a major source of energy, and this is really the crux of it. We have seen and everybody has experienced, I probably don’t need to tell anybody listening to this just how big of an impact energy can be on total inflation. It only makes up between 6 and 10% of the overall consumer basket. But over the past two years roughly, it contributed one-third of the inflation that we’re feeling right now. So, it is something that we’re going to need. It’s something that the suppliers have cut back on, and we know that it hits inflation pretty hard, Tony.

TONY ROTH: I think what I'm hearing is that there are two things that are coming together to cause energy to be inflationary over the next decade, two decades, etcetera. One is that we are not investing, we being the industry is not really investing, enough in order to even maintain our current output at the current cost on our inflation-adjusted basis, much less growing the current output of hydrocarbons.

And I guess a third factor would have to be that the overall aggregate energy usage of the world is growing; it’s not staying flat.

So, you put those three components together and we don’t have enough energy going forward because hydrocarbons are coming off faster than they need to be replaced by green energy sources given the growing appetite for energy. And, therefore, supply-demand, cost of energy is going to go up and that’s inflationary.

LUKE TILLEY: Yeah. And then, the last bit that we talk about are the impacts on commodities. You know, the world has been so focused on petroleum for more than 100 years.

We all know Saudi Arabia. We're all accustomed to talking about oil. We are less accustomed to talking about things like graphite, aluminum, copper, nickel, lithium, cobalt. These are all the kind of things that even if we could agree upon it and everybody wanted to put all of our resources into developing these new sources of energy and renewable sources, those are the things that are going to become ever more important to make solar panels, to make EVs [electric vehicles].

So, an electric vehicle uses about 400 pounds more of aluminum and 150 pounds more of copper than a standard internal combustion engine automobile that we have now.12 And even a slower transition, under current policies, which by a lot of people’s reckoning is not even fast enough, we’ve got forecasts for the demand of these commodities and the price of these commodities to move significantly higher. The IMF [International Monetary Fund] is projecting, triple-digit percentage growth in the cost of some of those things and copper up by 60%.13 So, that’s going to be challenged too. This tenuous transition is all about moving from one supply-demand issue to another supply-demand issue. 

TONY ROTH: So, let's bring it all together. So, we have a shortage of workers and a shortage of call it inspired workers or engaged workers. We have a shortage of or a growing shortage of supplemental labor from China. We have a shortage of energy. Yet at the same time, we have a significant headwind from a fiscal standpoint.

Over the last few years, we’ve spent $4.5 trillion on stimulus, putting cash into people’s pockets and companies’ pockets and different kinds of programs to support banks and the economy. And we have a more restrictive monetary environment, which will slow down things pretty radically in the Fed raising interest rates. You put all that into the soup, where does that bring the inflation equation to, let’s say by the middle of next year?

LUKE TILLEY: We're expecting inflation to decelerate, as it has been. We expect it to come down to about 3% in the middle of next year. Of course, the Fed’s target is 2% over time and it could even dip a little lower than the 3%.

But the fundamental thrust of all of this is not just at that month over month and the year over year. It’s that these things are going to combine to make it much more challenging for inflation to remain at 3% or even to move down to the Fed’s target with all of these impacts, Tony.

TONY ROTH: So, just to review, I think this is really important. We have a very strong consumer but a weakening consumer due to the fact that they’re spending through all the money that they had saved during the pandemic. They’re now on credit cards. Obviously, there’s limits to how much, especially in a higher interest rate environment, people can carry on their credit cards.

So, with all that happening, we do expect the consumer to start to really subside getting into next year. Consumers have been very focused on goods. Now they’re on services. So, we’re seeing the prices for goods rollover, even deflating in many cases. Something similar, maybe not as acute, will start to happen on the services side.

That’ll start to bring prices down really quickly, but they’ll get stuck. They’ll get stuck around that 3% level because we have these three very strong structural inflationary forces that are going to be really hard to combat, the tight labor markets, the lack of cheap supplemental labor, and the lack of cheap energy all coming together to keep inflation higher.

So, Meghan, what does that mean for—we’ll come back to next year in a moment. But what does that mean for investors over the next three to five years, let’s say?

MEGHAN SHUE: I think that’s a great question. And what we saw in the post-global financial crisis era of ultra-low interest rates, extremely accommodative monetary policy was that investors were incentivized to take on risk. Savers were essentially punished. And there was really one place to go in the market and that was, richly valued growthier stocks, so stocks that, you know, trade at a premium but have these lofty earnings growth expectations way out in the future.

Now, if we’re looking at a slightly higher inflation environment, a slightly higher interest rate environment, and monetary policy that’s not likely to go back to those ultra-accommodative ways, we’re probably looking at, really an environment where diversification starts to work again, both at the asset class level and also within equities. So, Tony, as you pointed out, fixed income’s looking more attractive. A stock/bond diversified portfolio is likely to maybe not generate a higher return overall, but probably for those investors looking for income and yield, probably a better return overall over a medium timeframe.

And then, within equities too, I think that there’s a place for somewhere in the middle between the high growth and deep value factors or styles, if you will. Technology is going to continue to power our economy and be the place of innovation. And if you’re not looking at interest rates, continuing to move up at the pace that they have I think growth can start to work again, but probably not those more speculative parts of the market where we really saw investors reaching for yield or taking on too much risk because the cost of capital was just so low. So, we’re really looking at, you know, liking growth but also keeping an eye on valuations.

TONY ROTH: So, when we think about next year, probably our most likely scenario is that the Fed raises rates to over 5%, fed funds rates. That sort of breaks the back of the consumer to some degree and we have a mild recession, not millions of job losses but, you know, some job losses, maybe a million or so. And in that environment, you would typically think that the equity market would go back down and retest the lows that we saw earlier this year.

If that is the outcome from an economic standpoint, which is consensus right now, do you think that the mark, the equity market would, in fact, do that? Or why is the equity market above 4,000 now on the S&P given that outlook that seems to be pretty pervasive in the financial community?

MEGHAN SHUE: Well, if you look historically at data in past cycles, and we do a lot of analysis on what’s happened in prior cycles, we’ve seen the lows so far for the market in September. Atlanta Fed GDP now is estimating about 2.8% for fourth quarter GDP [gross domestic product].14 So, let’s just assume we’re not in a recession right now. It’s—

TONY ROTH: That, that’s healthy.

MEGHAN SHUE: Right, exactly. That's a very robust pace of growth. So, you know, absent falling off a cliff in the first quarter, maybe it is a, an end of first quarter/second quarter type of slowdown. It would be very unusual for the market to have bottomed six months ahead of the onset of a recession.

Typically, you look at the market to bottom in some cases immediately before the recession starts, in most cases actually in the early innings of the recession. So, if we’re not there yet, I think that’s one reason to suggest that maybe we need to see a little bit more weakness in the market perhaps around the next earnings season.

But on the other hand if we are right and this is a mild recession, unlike the ones that we’ve seen over the past three cycles, and you’re talking about the economy coming out of it and the Fed even being in a position to start cutting rates at the end of 2023, it’s very possible that the market looks through this and we don’t have to see a retest of the lows that we saw in September. 

TONY ROTH: Clearly, this is a Fed that even though it has a dual mandate has been very concerned about the third rail of economic growth.

And so, I think the market is seeing that and the market’s appreciating that and the market feels that even though the Fed may go up above 5%, it’s going to come right back down if it needs to in order to tame the recession. So, given that uncertainty, our position today being pretty neutral across equities until we get better visibility into how the market is going to react to a assumed recession at this point is really the prudent approach. So, with that, I want to ask you, Meghan, a last question, which is given our most likely scenario which is this recession, are there any specific investments that you would be counseling that clients overweight in their portfolios today?

MEGHAN SHUE: Well, we do a lot of work within the factor space. And what our factor work is telling us is that valuations for growth stocks are attractive relative to history and a slower or a below trend economic growth next year would suggest investors should seek out those companies generating their own organic growth. So, we have a slight tilt to growth in the portfolio.

Within sectors, a lot of the principles that Luke talked about related to energy are leading us to remain favorable on the energy space, so having an overweight there in portfolios and staying, again, staying diversified. Looking for companies that are profitable.

TONY ROTH: Thank you so much, Meghan. It’s critical to appreciate that while inflation is going to come down as the consumer slows down, there are some very critical structural forces here in labor, China, and energy that are going to cause inflation to remain elevated compared to where we were over the last decade-and-a-half, but not necessarily elevated to obscene levels, to structurally problematic levels, elevated around 3% we think, maybe 3.5%, but probably 3% on average over the next half-decade, which is about 1% above the Fed’s target. And those are levels that are very consistent with strong returns for the overall portfolio.

They’re levels where we can have a full allocation to bonds. Whereas we’ve been underweight bonds for many years, we can move back to a full allocation on bonds, probably not an overweight though. And that we can have full allocation to equities to complement the full allocation to bonds because if we look historically at the, what we call the equity risk premium, which is the expected return for equities for the risk that we’re taking in an environment where interest rates are around let’s call it 3 to 4% on the 10-year, maybe even a little bit lower than that, frankly, equities can perform quite well.

And so, diversification is going to really be the friend of the long-term investor.

So, I want to thank Luke, Meghan, and Rhea for being here today. It was a really terrific conversation.

MEGHAN SHUE: Thank you, Tony.

LUKE TILLEY: Thank you.

RHEA THOMAS: Thank you.

TONY ROTH: And for the entire Capital Market Forecast report, you can look at wilmingtontrust.com and download the PDF in all its glory with all its footnotes and have a read. I think it’s really a terrific, terrific piece of research. So, thank you all so much for listening.


1 How the $4 Trillion Flood of Covid Relief Is Funding the Future - The New York Times (nytimes.com).

2 “Estimates of the Unauthorized Immigrant Population Residing in the United States,” U.S. Department of Homeland Security, October 20, 2022.

3 Ibid.

4 Jim Harter, “Is Quiet Quitting Real?” Gallup. September 6, 2022.

5 The Harris Poll COVID-19 Tracker, Wave 135. September 28, 2022.

6 China and the WTO: An uneasy relationship | CEPR.

7 Bloomberg, The World Bank.

8 Kathy Hipple, et al., “Oil Majors’ Shrinking Capex Signals Industry in Decline,” Institute for Energy Economics and Financial Analysis, February 2020.

9 International Energy Agency (IEA).

10 Ibid.

11 Ibid.

12 Mark P. Mills, “The Coming Green-Energy Inflation,” Wall Street Journal, April 17, 2022.

13 Ibid.

14 Archive of Past GDPNow Commentaries - Federal Reserve Bank of Atlanta (atlantafed.org).


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