Washington Policy Themes for 2023
As we enter the new year, there are several major changes across the policy landscape that will undoubtedly impact financial markets. The Strategas Washington Research team kicks off 2023 by discussing some key themes and items for investors to watch in the year ahead.
Last year was marked by a complete upending of our long-standing monetary, fiscal, and geopolitical frameworks. The Federal Reserve had to fight inflation for the first time in 40 years, the US experienced its largest fiscal contraction since 1947, and China and Russia formally challenged the Western world order. This year will be shaped by how policy responds to the aftershocks of 2022’s events. Below, we present three of our most important themes for 2023:
National security is becoming more important than economic efficiency. Last year, China and Russia vowed to challenge the Western world order, and Russia’s attack on Ukraine forced companies to rethink their supply chains. Policymakers are now prioritizing national security and resilient supply chains over economic efficiency. We are seeing greater use of export controls, incentives to bring supply chains home, and increased scrutiny of US investments in China and other countries of concern. We are moving to a more deglobalized world, one in which investors need to anticipate higher inflation (3%), slightly higher interest rates, and lower price-to-earnings ratios on stocks. We have not experienced such an environment since the period before the Berlin Wall fell in 1989, an event which accelerated globalization.
Deficit politics return in 2023. Deficit politics are set to stage a comeback due to the Federal Reserve raising interest rates and a coming political fight over raising the debt ceiling in 2023. Higher interest rates will increase US debt-servicing costs, which will come just as tax revenues are decelerating. When interest costs as a percentage of tax revenues hit 15%, financial markets begin to impose discipline on policymakers. This has not happened in 32 years, but is on our radar for 2023. In addition, members of the House are demanding spending cuts in exchange for raising the debt ceiling later this year. We could see market turmoil over the course of the year due to political fights over spending cuts and the debt ceiling.
The energy transition is inflationary and bolsters fossil fuels, commodities, and renewables. President Biden came into office pushing for greater adoption of electric vehicles and renewable energy. After Russia’s attack on Ukraine, energy security took on greater precedence than emissions reductions, but it did not ebb the push for clean energy. In 2022, Congress passed the Inflation Reduction Act, which includes $300 billion in spending and clean energy tax credits over the next 10 years. However, renewables require key commodities such as lithium and cobalt, which are largely produced in China and other countries where geopolitical tensions are growing. Taken together, fossil fuels, mining, and renewables will all continue to be in demand, and the energy transition will continue to be inflationary.
The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.
This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.
This report does not provide recipients with information or advice that is sufficient to base an investment decision on. This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.
For investment advice specific to your situation, or for additional information, please contact your Baird Financial Advisor and/or your tax or legal advisor.
Fixed income yield and equity multiples do not correlate and while they can be used as a general comparison, the investments carry material differences in how they are structured and how they are valued. Both carry unique risks that the other may not.
Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.
Strategas Asset Management, LLC and Strategas Securities, LLC are affiliated with and wholly owned by Robert W. Baird & Co. Incorporated, a broker-dealer and FINRA member firm, although the firms conduct separate and distinct businesses.
Copyright 2023 Robert W. Baird & Co. Incorporated.
UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W. Baird Limited holds an ISD passport.
This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed to private clients. Issued in the United Kingdom by Robert W. Baird Limited, which has an office at Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB, and is a company authorized and regulated by the Financial Conduct Authority. For the purposes of the Financial Conduct Authority requirements, this investment research report is classified as objective.
Robert W. Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the Financial Conduct Authority ("FCA") under UK laws and those laws may differ from Australian laws. This document has been prepared in accordance with FCA requirements and not Australian laws.