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1、2023 OUTLOOK LOOKING THROUGH TO RECOVERY2023 OUTLOOK2To Our Clients and Friends,To me,the defining feature of the 2020s is speed.Weve seen how fast a virus spread across the world and shut down half of the global economy.Weve watched with admiration and gratitude as scientists raced to develop vacci
2、nes and treatments.Weve benefited from quickly enacted monetary and fiscal measures to support citizens and economies.Russias invasion of Ukraine in February of this year marks the reversal of decades of global economic interdependence that was presumed to preserve peace.Once again,policymakers and
3、companies acted with incredible speed.Sanctions were passed and enforced.Many companies,including BNY Mellon,exited Russian operations.And central banks raised interest rates to combat high inflation.In the United States,monetary tightening is proceeding at the fastest pace ever.With this backdrop,2
4、022 was a difficult year for investors.As we look ahead to 2023 and beyond in our 2023 Outlook,inflation will be the key metric for investors.We expect the Federal Reserve to raise its target interest rate to around 5%.As a result,inflation will continue to decline,but remain above the low levels we
5、 have experienced since the global financial crisis.We forecast a mild recession but a regime change ahead for stocks and bonds,with both offering attractive opportunities.Speed will continue to be a theme,as markets move quickly when they anticipate change.We recognize that speed is challenging its
6、 dizzying and makes it hard to maintain perspective.Rudyard Kipling in his poem If famously wrote that learning to“keep your head when all about you are losing theirs”is part of growing up.Its also part of managing wealth.Over our two centuries of serving families,weve learned that consistent steps
7、in five disciplines are the keys to sustaining wealth:Investing,Borrowing,Spending,Managing Taxes,and Protecting Legacy.The impact of these disciplines is amplified in volatile markets,which is why we act on them with you every year to sustain your success across cycles and generations.We dont expec
8、t our world to slow down any time soon.But we hope that you do at least for the holidays!secure in the knowledge that we will be here to support you.Thank you for your trust and confidence.It is precious to us,and we are committed to continuing to earn it.With our best wishes for the holidays,and fo
9、r good health and success in the new year.Catherine Keating Chief Executive Officer,BNY Mellon Wealth Management 2023 OUTLOOK3KEY TAKEAWAYSA mild global recession is likely,with a recovery expected toward the end of 2023.Inflation moderates but remains elevated above the post-global financial crisis
10、 level of near 2%.The Federal Reserve(Fed)is likely to hike and hold due to elevated inflation in the services sector.Bonds are back as higher yields can now provide attractive income and a ballast in portfolios.A new equity regime emerges as the era of ultra-low rates and enhanced liquidity recedes
11、 and investors face a new world of higher borrowing costs and lingering inflation.12345A recession is likely in 2023,but investors should look beyond it and position for recovery in a new investing environment shaped by higher rates,lingering inflation,and hawkish central banks.2023 OUTLOOK4What Wil
12、l 2023 Hold for Investors?2022 will soon be behind us,and not a minute too soon.It has been a year of unprecedented volatility.Inflation at a 40-year high and the fastest Fed interest rate hiking cycle since 1980 resulted in negative returns for most asset classes.Will 2023 be any better?We think th
13、e answer is yes,eventually.Inflation appears to have peaked,which will eventually enable central banks to slow the pace of rate hikes and ultimately shift into a holding pattern.However,risks have now shifted to the lagged impact of aggressive monetary policy tightening on economic growth and earnin
14、gs.We see a 70%probability of a global recession,but in our view it will likely be mild and short-lived.However,the market has yet to price this in,which is why we expect volatility to continue in the first half of 2023.History tells us that markets can rebound before a recovery in the real economy.
15、These rallies are very hard to pinpoint and can happen quickly,making it critically important to stay invested.Its likely to be a challenging investment landscape,but one that will undoubtedly present opportunities.Exhibit 1:Tightening Cycle Journey2022Inflation and Rate Risk2023-2024Recession and E
16、arnings RiskWe Are HereInflation Hot;Not TransitoryFed Hikes the Fastest in 40 YearsEconomy Shows Signs of WeaknessInflation PeaksFed SlowsEconomy SlowsInflation FallsFed HoldsPotential RecessionSource:BNY Mellon Wealth Management.For illustrative purposes only.As of December 20,2022.Fed CutsEconomi
17、c Recovery Begins2023 OUTLOOK5Recession or No Recession?The U.S.economy has remained resilient to date,despite high inflation and the rapid pace of rate hikes totaling 4.25%over 10 months.Aided by a tight labor market,increasing wages and more than$1 trillion of savings leftover from the pandemic,co
18、nsumer spending continued to drive U.S.growth through the third quarter.Novembers consumer price index(CPI)helped to confirm that inflation has peaked,with both year-over-year headline and core readings slowing for the second consecutive month.Yet,even as inflation is easing and the Fed begins to sl
19、ow its pace of tightening,we are concerned that stickier inflation drivers,namely labor and shelter costs,will keep monetary policy tighter for longer and push the economy into a mild recession.Exhibit 2:Inflation Peaking,but Still at Multi-Decade HighIn Europe,energy shortages caused by Russias inv
20、asion of Ukraine have already taken a toll on growth in the Eurozone and the U.K.,and will keep upward pressure on inflation as long as the war continues.Despite inflation remaining at 10%,the Eurozones growth has surprised to the upside thus far,but the region will likely fall into recession in the
21、 first quarter.Chinas growth is expected to improve and could get a boost from the end of its zero-Covid policy,although there is still uncertainty surrounding the pace of its reopening.Exhibit 3:Our Global Growth and Inflation EstimatesGrowthInflationGrowthInflationU.S.-0.5%0.5%4%5%2%3%2.5%3.5%Euro
22、zone-1.0%0.0%6%7%1%2%1.5%2.5%China3.5%4.5%1.75%2.75%4%5%2%3%20232024Source:BNY Mellon Wealth Management.As of December 6,2022.We see a 70%probability of a global recession,but in our view it will likely be mild and short-lived.”“2Exhibit 2:Inflation Peaking,but Still at Multi-Decade HighSource:Bloom
23、berg.Data as of 11/30/22-4-2024681012Headline CPI Year/Year,%USEurozoneUKChinaSource:Bloomberg.As of November 30,2022.2023 OUTLOOK6The Feds Battle Isnt OverThe Fed increased interest rates another half percent to a target rate of 4.25%to 4.50%in December,after headline inflation slowed in October an
24、d November.With the central bank hiking at a slower pace,the focus is turning to when the rate cycle may come to an end.In prior tightening cycles,the cycle ended when the federal funds rate was greater than the inflation rate.With the current inflation rate nearly three percentage points above the
25、fed funds rate,the Fed likely has more work to do.We expect the fed funds rate to peak around 5%by the middle of next year.While market consensus has priced in interest rate cuts by the third quarter of 2023,we think the Fed is likely to hold rates steady after its final hike.Exhibit 4:Fed Has More
26、Work to DoAt the center of the Feds battle against inflation is the U.S.s chronic shortage of labor.Better-than-expected gains in both wages and employment in November underscored the labor markets resiliency.While goods prices have declined,and the housing markets sharp downturn should soon be refl
27、ected in inflation through lower shelter costs,a strong labor market continues to add to inflationary pressures.Inflation should continue to decelerate in 2023,but its unlikely to reach the Feds target of 2%until at least late 2024.BNY Mellon Wealth Managements forecast is for the headline consumer
28、price index to fall to 4%-5%by the end of 2023.“We think the Fed is more likely to hold rates steady after its final hike.”4Exhibit 4:The Fed Has More Work to DoSource:Strategas.As of 12/14/2022WI-318491Fed funds rate and inflation(%)at the end of prior tightening cycles0%5%10%15%20%25%Fed fundsCPI
29、inflationSource:Strategas.As of December 14,2022.2023 OUTLOOK7Fixed Income More AttractiveBonds suffered their worst performance in 40 years in 2022,with the Bloomberg Aggregate Bond Index down about 11%after partially recovering from even steeper declines.1 But the inherent upside of a decline in f
30、ixed income prices is that bonds now offer their most attractive yields in more than ten years.Exhibit 5:Bond Yields at Their Highest Levels In A DecadeFor investors,it means that TINA(There is No Alternative to Equities)is over,with the focus now on generating income through higher yields.At a 3.5%
31、yield,10-year Treasuries offer greater income than the S&P 500s 1.8%dividend yield.With these improved yields,we are upbeat about the potential for more attractive total returns moving forward and for bonds to revert to their traditional role as a ballast in portfolios.The Treasury market has endure
32、d extreme volatility in the past year.Historically,a yield curve inversion when short-term yields are higher than long-term yields has been a reliable predictor of recessions.As of mid-December,the yield curve was the most inverted it has been since the early 1980s.Looking ahead,we expect the yield
33、curve to invert further in the first quarter of 2023 as markets price in peak rates and weaker economic data appears.The Treasury yield curve should normalize as markets price in an eventual economic recovery in the latter part of the year.We forecast a 10-year Treasury note yield in the 3.5%-4.0%ra
34、nge by the end of 2023.Thats close to where it is today,but investors should be prepared for significant volatility in the interim.1As of December 14,2022.6Exhibit 5:Bond Yields at Their Highest Levels In A Decade-20246810Yield,%Source:Bloomberg.Note:BBG Corp.Index used for investment grade bonds.As
35、 of December 14,2022.5.083.581.05 10-yr Treasury(TSY)10-yr TSY minus expected inflation US Investment Grade Bonds“We are upbeat about the potential for more attractive total returns moving forward and for bonds to revert to their traditional role as a ballast in portfolios.”2023 OUTLOOK8Exhibit 6:In
36、verted Yield Curves Signal Recessions More Pain Before Gain in Equities 2022 was a volatile year for equities with an environment of higher inflation and higher interest rates putting downward pressure on valuations.Equity price-to-earnings(P/E)multiples weaken with higher inflation,particularly whe
37、n the rate is above 6%,as weve seen this year.The 12-month forward P/E fell from 21.5x in January,which is historically high,to the 2022 low of 15x in October.Exhibit 7:Impact of Inflation on Multiples Looking ahead,we dont expect stocks to bottom until the market prices in a recession and Wall Stre
38、ets consensus 2023 earnings per share(EPS)estimate falls further.At$232,the consensus EPS estimate is considerably higher than our$205-$215 estimate,which reflects the weakening economy.8Exhibit 7:Impact of Inflation on Multiples*Source:Strategas.Data as of Q3 202216.8x18.6x17.4x15.1x11.6x11.5x8.5x8
39、.0 x4x8x12x16x20 x-2-0%0-2%2-4%4-6%6-8%8-10%10-12%12-14%S&P 500 Average PE Inflation TrancheSource:Strategas.As of September 30,2022.7Exhibit 6:Inverted Yield Curve Typically Coincide with Recessions Source:Bloomberg.As of 12/14/22-3-2-982720022007201220172022RecessionUS Yield
40、Curve(10-yr-2-yr Treasury,%)Source:Bloomberg.As of December 14,2022.2023 OUTLOOK9Our 2023 year-end range for the S&P 500 is wide at 3,800 4,500,reflecting the considerable macro-uncertainty ahead.Based on the midpoint of this range,thats a gain of about 9%from todays S&P 500 level of about 3,800.Mar
41、kets are discounting mechanisms and will begin to price in an earnings recovery before we start to see improvements in the economy itself.Assuming an economic recovery by the end of 2023,we anticipate earnings will move higher in 2024 and have estimated an earnings of$240-$250.Although it is unlikel
42、y the market will have a V-shaped recovery given the prospect of higher rates and inflation continuing in the coming years,we do expect returns to be positive in 2023.Positioning for Potential Recession and RecoveryWhile 2022 was a challenging year,we believe some of our asset allocation shifts over
43、 the last year have allowed portfolios to adapt to an environment of higher rates,lingering inflationary pressures and a hawkish Fed.These adjustments included a neutral equity posture,an underweight to non-U.S.equities,an early underweight to fixed income,increased exposure to alternatives and buil
44、ding more liquidity,which will allow us to take advantage of forthcoming market dislocations.With a 70%chance of a recession in 2023,our cautious positioning with a neutral weighting in equities,a small underweight in fixed income and a small overweight to less correlated diversifiers remains pruden
45、t.Until we see more evidence of earnings weakness and an economic slowdown,we will remain cautious.For the first time in more than a decade,fixed income will provide more yield than equities and play its traditional role as a diversifier to offset stock market volatility.We have shifted positioning
46、within our fixed income allocation to capture yield,increase quality and modestly extend duration ahead of a recession.We continue to favor credit,especially investment grade corporate bonds given their attractive yields and improving corporate balance sheets.We are a bit more cautious on high yield
47、 bonds and may reduce our neutral weighting should credit ratings and profitability begin to deteriorate.While off their highs,municipal bonds still offer attractive after-tax yields,especially within intermediate and long maturities.Our equity allocation favors the U.S.relative to other markets,wit
48、h a preference for large cap stocks.There has been a regime change within equities,with companies that outperformed in the era of ultra-low rates and ample liquidity expected to underperform in an environment of higher borrowing costs and lingering inflation.High-quality companies that generate stro
49、ng cash flows and profits,as well as those that offer sustained dividend growth,should provide better value.Although we maintain a small underweight to non-U.S.equities,there is the potential to increase exposure to beaten down areas of the market in the new year,especially if the U.S.dollars streng
50、th softens.This could occur as the U.S.economy slows and interest rate differentials begin to converge as the Fed nears the end of its tightening cycle.We are also watching for opportunities in small cap stocks,which tend to outperform large caps when bear markets end.“Although it is unlikely the ma
51、rket will have a V-shaped recovery given the prospect of higher rates and inflation continuing in the coming years,we do expect returns to be positive in 2023.”Importantly,alternative investments,or diversifiers,should continue to help enhance risk-adjusted returns and deliver diversification benefi
52、ts via their low correlation to public markets,as we saw in 2022.Within alternatives,non-traditional strategies can take advantage of dislocations in markets and the economy while providing less correlated sources of return to portfolios.Real assets,such as infrastructure and private real estate,can
53、 benefit from rising prices and should continue to provide a good inflation hedge.Strategies such as global macro,distressed investing and opportunistic real estate are positioned to take advantage of dislocations that may occur globally as central banks continue to reduce liquidity and increase the
54、 cost of capital.We also believe recessionary and post-recessionary periods are opportune times to allocate to private equity as skilled managers can purchase companies at lower prices and utilize an active,hands-on approach to driving growth and creating value.Exhibit 8:Asset Class Positioning Sour
55、ce:BNY Mellon Wealth Management.Reflects portfolio positioning within the Fully Diversified Balanced Model for taxable clients.As of December 6,2022.EquityLarge CapMid CapSmall CapInternational Developed Large CapInternational Developed Small CapEmerging MarketsFixed IncomeTreasuriesInvestment-grade
56、 CorporateTax-exemptHigh YieldEmerging Market DebtDiversifiersLong/Short HedgeAbsolute Return HedgeReal AssetsPrivate EquityUnderweightSmall UnderweightNeutralSmallOverweightOverweight2023 OUTLOOK112023 and Beyond Investors should also remember the importance of maintaining a long-term perspective.O
57、ften after a challenging year of negative returns,markets gravitate toward their historical averages.In fact,our 2023 10-Year Capital Market Assumptions forecast higher returns across most asset classes compared to last years projections.Exhibit 9:2023 vs.2022 10-Year Capital Market Return Assumptio
58、ns9Exhibit 9:2023 vs.2022 10-Year Capital Market Return AssumptionsSource:BNY Mellon Investor Solutions.Data as of September 30,20225.9%5.8%7.6%6.5%6.9%9.3%0.0%2.0%4.0%6.0%8.0%10.0%U.S.EquityInternational DevelopedEmerging Markets2022202310Exhibit 9:2023 vs.2022 10-Year Capital Market Return Assumpt
59、ionsSource:BNY Mellon Investor Solutions.Data as of September 30,20221.2%1.9%0.9%0.3%3.8%4.1%6.2%2.8%3.0%4.0%0.0%2.0%4.0%6.0%8.0%U.S.AggregateU.S.High YieldU.S.IntermediateMuniGlobal Agg.Ex-U.S.EM Local Currency20222023EquityFixed IncomeAlternatives11Exhibit 9:2023 vs.2022 10-Year Capital Market Ret
60、urn AssumptionsSource:BNY Mellon Investor Solutions.Data as of September 30,20223.2%3.9%7.9%4.7%4.3%4.9%8.2%6.0%0.0%2.0%4.0%6.0%8.0%10.0%Absolute ReturnHedge FundsU.S.Private EquityU.S.Core Real Estate20222023Source:BNY Mellon Investor Solutions.As of September 30,2022.2023 OUTLOOK12While we expect
61、a better return environment in 2023,volatility is likely to persist until we gain more clarity on the lagged impact of the Feds tightening cycle on the real economy.However,any downturn from here will likely present investors with good entry points as markets tend to move higher over time.With that
62、said,timing the bottom of the market is extremely challenging.We encourage clients to stay invested,as the best days in the markets often quickly follow the worst and we have seen this play out this year during several bear market rallies.Most importantly,investors should remember that markets are f
63、orward looking and anticipate changes in the real economy,roughly 6-12 months ahead of when they appear in economic data.While the market is unlikely to bottom before the recession starts,it can rally before the data turn uniformly positive.Exhibit 10:Dangers of Market TimingThere will be an inflect
64、ion point where markets see through to the recovery.This transition to an environment of higher rates,higher inflation and tighter monetary policy has been fraught with volatility.We believe the combination of timely asset allocation shifts,broad diversification,and the discipline to stay invested o
65、ver the long term will be critically important.We will keep you informed of key developments and their impact on investment strategy and,as always,help you uncover opportunities that can help build and preserve your wealth.Timing the bottom of the market is extremely challenging.We encourage clients
66、 to stay invested,as the best days in the markets often quickly follow the worst.“”1Exhibit 10:Dangers of Market TimingSource:Strategas.As of November 30,2022.8.1%6.4%5.2%3.2%1.5%0.0%-1.4%-2.0%0.0%2.0%4.0%6.0%8.0%10.0%FullyInvestedLess 5 BestDaysLess 10 BestDaysLess 20 BestDaysLess 30 BestDaysLess 4
67、0 BestDaysLess 50 BestDaysS&P 500 Compound Annual Growth Rate(%)Based on Days Missed in the MarketJanuary 1,1995-November 30,2022 Source:Strategas.As of November 30,2022.Fully InvestedLess 5 Best DaysLess 10 Best DaysLess 20 Best DaysLess 30 Best DaysLess 40 Best DaysLess 50 Best Days2023 OUTLOOK13T
68、his material is provided for educational purposes only.This material is not intended to constitute legal,tax,investment or financial advice and may not be used as such.Effort has been made to assure that the material presented herein is accurate at the time of publication.However,this material is no
69、t intended to be a full and exhaustive explanation of the law in any area or of all of the tax,investment or financial options available.We recommend all individuals consult with their lawyer or tax professional,or their investment or financial advisor for professional assurance that this material,a
70、nd the interpretation of it,is accurate and appropriate for their unique situation.The comments in this paper reflect the authors views and may not reflect the opinion or views of BNY Mellon.BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York
71、 Mellon Corporation.Trademarks and logos belong to their respective owners.The information in this paper is current as of December 2022.It is based on sources believed to be reliable,but its accuracy is not guaranteed.2022 The Bank of New York Mellon Corporation.All rights reserved.|WI-330699BNYMellonWealth|