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A Further Look | Jul 20, 2023

Mid-year Update: My Six ‘What If’ Scenarios for 2023

David B. Root, Jr.


In the January edition of A Further Look, I offered a number of ‘what ifs’ for us to consider as we navigate 2023’s economic challenges. Now that we are halfway through the year, I wanted to review and report back to you on the status of my scenarios. While some questions still aren’t fully answered, and others may continue to unfold beyond 2023, each remains top of mind for us as participants in the economy and capital markets.

1. What if the economy isn’t as bad as many are suggesting?

I remain cautiously optimistic that the economy and the market will remain resilient.

Some may call it a ‘tale of two economies’. According to the Bureau of Labor Statistics, employment increased by 339,000 jobs in May. Great. But the number of unemployed persons also increased – by 440,000. Weird.

Downside: High interest rates, debt overhang, money-supply overhang, the commercial real estate time bomb and pending corporate-earnings deflation.

Upside: inflation and rate increases appear to be closer to the end than the beginning. The U.S. looks like a haven for stability compared with the rest of the world. White-collar layoffs and blue-collar labor shortages are starting to decline. Banking appears to have stabilized.

The stock market has caught everyone by surprise, with the Nasdaq posting returns of 30% and the S&P 500 at 15%. Earlier this year, many ‘experts’ forecasted that 2023 could see a downturn in stocks similar to what we saw in 2007 or 2008. That simply has not happened. Technology has been a key driver and most of the attention has been on artificial intelligence (AI). That said, we also know that the rally has been narrow with the 10 largest stocks accounting for 90% of the S&P’s gain. Now we wait for more breadth in the market, as more sectors and companies participate in this year’s turnaround.

2. What if Federal Reserve Chairman Powell doesn’t raise rates as high as many are anticipating?

In mid-June, the Fed decided to leave interest rates unchanged. However, they indicated there will be further hikes in 2023 and the FOMC now projects a median fed funds rate of 5.6% by the end of 2023. More good news like the downward trending CPI and PPI reports could lead traders to look past the Fed’s tough talk and see a dovish turn later in the year.

But the Fed may have more than U.S. inflation on their radar. They will no doubt be keeping an eye on Europe and particularly the UK. The Bank of England surprised with a 0.50% rate hike this month.

3. What if Elon Musk is successful in his efforts to revitalize Twitter?

While less than perfect, Twitter has hosted campaign launches and provided new platforms for all points of view, from politics to controversial health and social issues. Subscriptions have reached 368 million daily active users worldwide and 63 million users in the United States. He is also monetizing many aspects of the platform.

Challenges abound, however. Many longstanding active users have taken issue with the move to a paid verification model, while others have complained about restructured timelines and new daily viewing limits. Perhaps a bigger threat than these internal issues is Meta’s recent launch of Threads, a text-based platform that represents a direct shot at Twitter by one of Musk’s most prominent industry and personal foes. In its first week, Threads reached 100 million sign-ups, including a large base of Twitter loyalists who appear to be testing an alternative on the heels of displeasure with the direction of Twitter’s user experience. Will Zuckerberg and Threads deliver the knockout blow to Musk and Twitter, or will Threads be the latest fleeting fad in the world of social media?

Personally, I won’t count Musk out. Tesla’s imminent demise has been over exaggerated for several years (GM and Ford have signed onto Tesla’s charging grid). The company continues to demonstrate Musk’s long-term commitment to competing. TSLA has gained around 143% year-to-date since reaching its early January low of $101.81. The stock jumped to $262.25 on June 22.

One reason to continue watching Musk closely is his business mindset. His recent moves with Tesla indicate that he is looking at the company as more of a platform than just an automotive company. The same appears true for his focus on Twitter becoming a platform and marketplace for ideas from all sides of the spectrum. This could make Twitter a primary source of news if it can withstand the many internal and external threats it currently faces. As a result, it could become a truly inclusive news network, allowing Musk to own the middle ground that has lond been ignored by traditional American media. (See number 6 below)

4. What if China doesn’t prove to be the big bad wolf everyone is fearing?

China’s reopening hasn’t met expectations and is contributing to a slowdown for the rest of the world. China’s position in world affairs, such as their support of Russia’s war with Ukraine and surveillance of the U.S., has put them at further odds with us.

Xi Jinping’s cult of personality is making it impossible for the rest of the world to deal with him. We have been through a cold war once before. It eventually led to the demise of the Soviet Union – could China be far behind? The recent discussions about Chinese military and surveillance installations being deployed in Cuba have created an eerie similarity between Xi and Nikita Kruschev!

5. What if the Securities and Exchange Commission (SEC) softens its planned rules requiring companies to disclose the effects of extreme weather and other costs related to global warming when the regulator completes its climate-change proposals?

The rule is now going to be pushed back further to the fall of this year amid bureaucratic and legal holdups. Given the new time frame, financial statements and disclosures under the rule would not be due until 2024.
The delay could be a blow to accelerated clean energy goals as they currently stand. Waiting in the wings is a massive movement regarding nuclear power with big money behind it. If it is successful in moving to the forefront of our energy discussion, it could change the entire narrative about the desperate need for a disruptive green energy strategy going forward.

6. What if the news and financial media become less biased and move their reporting from right-leaning or left-leaning to the center?

According to a recent survey by Fortune, half of Americans believe national news organizations intend to mislead, misinform or persuade the public to adopt a particular point of view through their reporting. Overall, 55% of respondents said there was a great deal of political bias in coverage, compared to 45% in 2017.

But there seems to be some movement toward the center. 40% of CNN viewers think the network has shifted to a more centrist or right-leaning tone. The net effect of the perceived shift is positive. More CNN viewers say the change would make them watch more (35%) primetime CNN content than watch less (17%). The changes are also positive among Fox News viewers — which includes some viewers who also watch CNN, as it isn’t mutually exclusive — with 39% saying they’d watch more CNN in primetime and 11% less.

As I mentioned previously, keep an eye on Twitter. Despite challenges posed by Meta’s launch of Threads, Twitter may have a major role in influencing other news media to continue moving toward the center, while Threads appears (at least initially) to focus less so on providing a sounding board for current events than ingratiating Instagram’s influencer-driven user base. A case in point could very well be CNN under their new ownership group, Warner Brothers Discovery, led by major shareholder John Malone.

As you can see, 2023 has no shortage of fascinating topics to follow. Living in a time of such historic change can be exciting, but we will need to plan for other what if scenarios that could greatly impact our portfolios and future asset allocation decisions. Stay tuned.

Thanks for reading,

This material has been provided for general, informational purposes only, represents only a summary of the topics discussed, and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice or recommendations. Rather, they simply reflect the opinions and views of the author. D. B. Root & Company, LLC. does not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation. There can be no assurance that any particular strategy or investment will prove profitable. This document contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information derived from such sources, and take no responsibility therefore. This document contains certain forward-looking statements signaled by words such as "anticipate," "expect", or "believe" that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. As such, there is no guarantee that the expectations, beliefs, views and opinions expressed in this document will come to pass. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. All investment strategies have the potential for profit or loss. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The impact of the outbreak of COVID-19 on the economy is highly uncertain. Valuations and economic data may change more rapidly and significantly than under standard market conditions. COVID-19 has and will continue based on economic forecasts to have a material impact on the US and global economy for an unknown period.

David B. Root, Jr.


Founder & Chief Executive Officer

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