The market has replaced inflation angst with recession fears, said Douglas S. Foreman, chief investment officer at Kayne Anderson Rudnick, an investment manager for institutional and retail clients.
"Inflation data improved over the last four to five months, and it appears that the numbers are headed in the right direction," Mr. Foreman said in an email. "The inverted yield curve gives a good reason for people to fear a recession, and we believe recession concerns are now the dominant investor focus for 2023."
Some industries, such as technology, which have enacted massive layoffs, are already in a recession, he noted. Indeed, California state tax revenues were down 50% in January — a big decline that reflected weakness in local tech firms. However, Mr. Foreman believes the risk of a "major (economic) downturn" is low.
"This has been the most anticipated recession in the history of mankind," he said. "Businesses were coming into this year very cautious. Avoiding a hard landing will be key to positive equity returns in 2023 and beyond."
But recession fears will not disappear overnight, Mr. Foreman added, so institutional investors "should expect continued volatility in 2023 and will need to be patient."
Strong employment numbers continue to hamper the Federal Reserve's bid to quell inflation.
"The Fed is committed to a federal funds rate of around 5%, which indicates we are not out of the woods and more rate increases are ahead, albeit likely smaller," he said. "Employment statistics will continue to be the bellwether guiding Fed policy. Any reduction of labor demand growth will be seen by the Fed as a positive indicator to slowing the economy."
However, assessing the labor market is tricky, he noted, because it's a lagging indicator. "It's one of the last things you see change directions when the economy turns down and when the economy turns up," Mr. Foreman said.
While he declined to identify specific subsectors of the market he is bullish on this year, Mr. Foreman emphasized that, in general, he likes "quality companies" that possess "defensible competitive advantages and strong balance sheets, which we believe have better defensive characteristics if economic growth and inflation continue to moderate." He added that stock selection in companies that "experience growth in a slower environment will be important this year."
Kayne Anderson has about $47.5 billion in assets under management.