Navigating Today's Unusual Economic Environment

Experts from Global X share their outlook for the economy and financial markets.

sumit
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Senior ETF Analyst
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Reviewed by: Lisa Barr
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Edited by: Lisa Barr

Markets have been remarkably resilient this year, but investors should still be cautious as they navigate today’s extremely unusual economic environment. That’s according to Jon Maier, chief investment officer, and Michelle Cluver, senior portfolio strategist, both of Global X. 

Maier and Cluver joined me in a wide-ranging webinar in which they offered their extensive outlooks for the U.S. economy and financial markets, as well as their views on how investors and advisors should position themselves to maximize their returns and weather any headwinds that come their way.  
 
One key takeaway from the webinar is that while the many calls for a recession in the U.S. have proven to be false (or premature), investors shouldn’t get complacent.  

There is still very much a chance of a recession in the coming months, as some of the factors that have insulated the economy thus far begin to fade.  

“You have tailwinds to growth: pent-up demand for labor [and] excess savings from all the pandemic economic programs,” Maier explained.  
 
That has kept the economy humming despite rapid interest rate hikes from the Fed. But it has also made the central bank’s task of bringing inflation down tougher.  

“Inflation has fallen, but it remains well above the Fed’s target,” Maier noted, while predicting the Fed will hike rates at least a few more times.  

Housing Market in Play 

Another factor keeping the economy aloft is the housing market. While housing began to show some cracks several months ago as high interest rates weighed on affordability, there are signs that the modest downturn is already beginning to reverse.  

That has stymied the typical recessionary process in which housing weighs on the broader economy.  

“Typically, a housing recession tends to start before a general recession, and that continues unabated until the end of a recession. If there’s less house purchasing, there’s all these downstream implications of less durable goods orders and home improvements. It trickles down,” said Maier, adding that this time “is different.” 

Supply shortages, combined with a healthy consumer, have stopped the housing downturn from becoming something bigger. That also makes this a much different environment than the one investors experienced during the global financial crisis more than a decade ago. 

During that period, “households entered the period overleveraged,” Cluver said, noting that, in contrast, consumer balance sheets are currently in “a much stronger position and labor market tightness as well as pandemic savings has put consumers in a vastly different position.” 

Cluver characterized the global financial crisis as “a systematic shock factor that sent ripples through global markets,” while the current slowdown in the economy is something much more gradual. 
 
The more moderate slowdown has given companies “time to adjust their projections and reduce their orders,” she added.   

Potential Shallow Recession 

Still, despite the economic resilience of the U.S. thus far, both Maier and Cluver saw the potential for a shallow recession.  

Cluver pointed to corporate debt refinancings in the coming year as something that could weigh on growth.  

“Speculative-grade firms within the U.S. have $354 billion in debt coming due by 2024, and of that 35% … is fixed rate debt that’s going to be refinanced, most likely at much higher yields,” she predicted.  

Does that mean the stock market is going to plummet? Not necessarily.  
 
“The market and the economy may be at different stages of the cycle, with economic growth slowing while the markets have already experienced [an] earnings recession and [are] starting to see improving earnings expectations,” Cluver said.  

Additionally, the tailwinds of A.I., onshoring and countercyclical corporate investments mean that the market could fare decently well even in a shallow recessionary environment.  
 
“Global spending on AI is forecasted to double to $300 billion by 2026,” Maier said. Though the tech has only benefited a handful of well-known stocks so far, its influence is “certainly going to broaden out,” benefiting the market, he added.  

Still, a recession is a recession, and given the potential for an economic downturn, investors should position themselves accordingly—though “a different playbook may be necessary” given the unique nature of the economy today, Cluver said.  

She advised investors to focus on three segments: defensive quality, key growth areas and certain cyclicals.  

In terms of quality stocks, she highlighted sectors like consumer staples, healthcare and utilities. 
 
Key growth areas to consider are AI, onshoring and infrastructure. 
 
Cyclical parts of the market that are compelling today include industrial commodities, which in Cluver’s view are pricing in a “severe economic pullback” and thus they offer “pockets of value.” 
 
All in all, investors needn’t panic, even if there ends up being an economic downturn.  

“Recessions are a normal part of the business cycle. They provide investors and financial advisors an opportunity to evaluate and reset,” concluded Maier. 

Both Maier and Cluver had much more to say in the webinar, so check out the embedded video to learn more.  


 
Contact Sumit Roy @[email protected] 

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.