Dig into the issues that will shape this year’s markets with CIO Shannon Saccocia.
Examining investment challenges and opportunities developing in 2023
During a recent fireside chat with investors and entrepreneurs, SVB Private’s CIO Shannon Saccocia shared her perspective and answered questions regarding the progression of the markets and the global economy in 2023 and beyond. This article summarizes the key takeaways from the conversation with direct quotes from Ms. Saccocia.
- Getting inflation under control and concerns regarding a Fed overshoot
Key takeaway: Gauging the pace of normalization will be the biggest challenge.
“…It's been a challenging 18 months or so. And as much as I would like to say that 2023 is nothing but rainbows and unicorns, there is likely to be some continued concerns as we go into 2023. The big concern in 2022 was the Federal Reserve. Coming into 2022 we anticipated that we would have a meaningful concern as it relates to inflation, certainly we had the issues in China, supply chain disruption there as well as the war in Ukraine that really exacerbated a lot of the inflationary concerns.
As much as all of us anticipated that we would have higher prices coming out of the pandemic, those two events really complicated the scenario. It's a little bit less about when things will normalize, and more about the pace of that normalization. So, one thing that everyone needs to understand about the Fed is that the Fed has a very strong will at this juncture to what we call anchor inflation. And how inflation gets anchored is that there is a real effort to eliminate some of the stickier parts of inflation.
If you think about the different levers that the Fed would be able to pull in the current environment, there is really only one: higher rates. That's why the Fed is remaining steadfast to higher rates, at least through the end of this year and into 2024.”
- Employment and the issue of too many jobs
Key takeaway: Tackling the current employment challenges will be a multi-year endeavor.
“…We currently have 10.5 million job openings in the United States and 3.5 million people seeking jobs. That doesn't get fixed overnight. There's a need to increase productivity and efficiency. So, companies that can make things more efficient and productive will have an advantage in this environment. They’ll be forced to invest in CapEx to improve productivity.
That encompasses a wide range of areas, such as human resource management to robotics. Any productivity/efficiency enhancements that can help boost the bottom line, the margin or take a few hires off of the open jobs list will provide an edge. I think that's where you're going to see those opportunities over the next couple of years.”
- CEO confidence and demand weakness
Key takeaway: With low CEO confidence, corrective action is on the horizon.
“…As group, CEOs are not confident at the moment. They're concerned that the Fed may have been overly aggressive. They're afraid that the Fed has actually tightened too much, too fast, and frankly, they've never tightened as fast as they did in 2022. So, it's a reasonable concern. CEOs are seeing new orders come down. Inventories are starting to build, not across all industries and sectors, but we've seen a contraction in leading indicators for services and for manufacturing.
CEO confidence is also highly predictive. Unlike consumers, when CEOs say that they're concerned, they do things about it; they cut job openings, they start cutting the projections for CapEx, they start creating more conservative forecasts. They start to take a look at their balance sheet, conserve cash and maximize free cash flow, if it's available.”
- Globalization and post-pandemic supply chains
Key takeaway: A confluence of supply chain issues contributed to the consumer price increases.
“…Back in 2020, many people underestimated the fact that there were so many stops along the way to get a product to a door near you, such as a throw pillow from Target. That started in China. It wasn't just the production in China. It was the production getting it to the port. It was the port itself. It was the container. It was shipping it. It was stopping along the way. It was the fuel. Every single aspect of that supply chain was immediately more expensive during the second half of 2020.
So, when you talk about what inflation is, it's basically...it's food, it's energy, it's durable goods. So, anything that you buy and hold. It's housing. And so, those are the main components of inflation. And the problem was that the supply chain dislocations didn't ease fast enough. So, companies had to start to pass those costs through at the point of consumption rather than just at points of production.”
- IPO market activity
Key takeaway: We anticipate the equity markets to stabilize in early 2024, setting the stage for increased IPO interest.
“…The big question for the IPO market now is, when do IPOs come back and what do they look like in our new environment? I expect IPO market activity will start to open up once we see some enthusiasm and some optimism about the equity market. I expect to see more appetite once the equity market starts to stabilize, and there is a recommitment of investors to take on more risk, but particularly more risk in what we call long duration or growth stocks.
And that just implies the fact that you are anticipating that much of your cash flow will be in a future state rather than today. And so, what we're anticipating is that we will start to see some stabilization in early 2024 as well as that increased appetite.”
- Recession severity
Key takeaway: Fast-moving hiring practices and price increases may have tempered the severity.
“…Depending on what you read, there are a lot of economists calling for a deep recession in 2024. And that's based on the fact that they believe that the Federal Reserve has made a mistake and raised rates too quickly.
My view is that the Fed probably reacted too slowly initially, but that their assessment that inflation was transitory and was based on the massive uptick in demand for goods that were just not able to be procured and provided in that time period was probably not wrong. I believe what they actually were not anticipating is how quickly companies would react to that, how quickly they would pass through those price increases, and more importantly, how quickly they would look to hire.”
- Venture capital investments
Key takeaway: We may start to see increased VC activity during the first quarter of 2024.
“…If you’re a venture capital firm, you don't have an indefinite investment period. So, you need to start being able to make some purchases. And I think that will coincide with that first quarter of 2024. I think that there is a premium being paid for management execution at the moment. It's a premium that's being paid in the public market and I think that sentiment will flow into in the private market.
Management that can execute in this period, I think, will be the first to really unlock that. And then I think that there will be certain sectors and industries that will probably come to market first because they are creating solutions for areas of potential economic growth.”
- Impact of recent high-profile layoffs
Key takeaway: Recent layoff headlines may not tell the whole story in a tight job market.
“…So, the Fed actually projects where they think unemployment will be. The Fed is projecting a year from now that unemployment will be 4.5%. That's 1.2 million jobs lost. So, it's going to have to come from other places besides technology and financial services. But that's the big question for investors right now is with the demand that we're seeing in all of these other industries, construction is already sort of declined, manufacturing is actually starting to pick up again because of the reshoring. How do you get from here to 1.2 million, 1.3 million jobs in a year unless it's more of a broad-brush economic slowdown?
So, for better or for worse, I don't think it abates that quickly. I think there's probably a few more rounds, but I think that those...especially on the engineer side, there are other industries, as I said, this undercurrent of technology, and it being important to a number of sectors and industries. There are likely good paying jobs in other industries that people can feel comfortable getting repurposed.”
- Promising consumer spending segments
Key takeaway: Despite varying consumer demographics, segments such as experience and convenience shine.
“…It’s clear that consumers, depending on the demographic, depending on the geography, certainly have different spending patterns. And so, I think from a consumer perspective, being able to figure out how to increasingly deliver, once again, lifestyle and experience is going to be important. Convenience, I think, has been a place where we've seen a lot of start-ups over the last 5 to 10 years, and increasing that consumer convenience. And I think that the idea about continuing to grow, regardless of the cost of per user, of bringing on people to the platforms, I think that that is going to be a model that's probably a bit under pressure in this environment.
There are certainly more resilient parts of the economy. But I also think that when we talk about the consumer, there are meaningful implications for low-income consumers from inflation, and there are meaningful implications for high-income consumers with the amount of liquidity that was produced in the last couple of years. So, there is clearly a divergence and being able to capture that. I think e-commerce is increasingly or just as important as it has been. But I think thinking about what differentiates e-commerce beyond just price or convenience is going to be increasingly important.”
Please feel free to reach out to your SVB Private Wealth Advisor for a deeper discussion regarding the points above, or a review of your current plan to confirm it remains aligned with your long term needs and goals.
