Economy, inflation are top of mind for financial services firms in 2023

In recent months, several financial services firms have released outlooks for 2023, providing critical insights for advisors as they help their clients navigate the challenges and opportunities that lie ahead. The battle against inflation, a possible recession and a potentially flat year for life insurance sales are all top of mind.

The Wells Fargo Investment Institute’s 2023 Outlook: Recession, Recovery, and Rebound outlines WFII’s expectations for a recession in the first half of this year, a recovery around midyear, and a rebound that gains strength into year-end.

The report looks closely at three key drivers: inflation, interest rates, and corporate earnings. WFII believes that the decline of inflation will be a dominant theme in 2023, shaping the trajectory of economic growth and interest rates.

Highlights of WFII’s forecast include:

• A recession and unwinding of inflationary shocks of the past 18 months could allow inflation to decline to under 3% on a year-over-year basis by year-end 2023.
• A moderate recession in the first half of 2023 may lead to a contraction for the year as a whole, marked by -1.3% U.S. GDP (gross domestic product) growth.
• Once investors begin to anticipate economic and earnings recovery, the S&P 500 Index is forecasted to gain into year-end. S&P 500 Index target range is 4,300 to 4,500 for year-end 2023.
• Federal funds rate forecast of 3.50% to 3.75% anticipates multiple policy interest-rate reductions after rates reach a peak above 4.50% early in 2023.

“The unfavorable risk-reward balance in both equities and fixed income jolted portfolio performance in 2022 and tilted our guidance more defensively for most of the year,” said Darrell Cronk, chief investment officer for Wells Fargo Wealth & Investment Management.

“And while we expect an economic recovery after midyear, we anticipate 2023 will be a volatile and challenging year for investors as we transition from a recession to a recovery; yet, we believe that it may create strong opportunities to reposition for growth and back into a more pro-risk stance as the next economic recovery and bull market emerges,” he said.

What’s in store for life insurance?

On the life insurance front, Elaine Tumicki said that the economic environment will likely have an impact on sales. Tumicki is LIMRA’s corporate vice president and director of insurance product research.

With high interest rates and inflation, consumers have less disposable income to purchase anything, including life insurance, Tumicki explained. Persistent inflation poses a risk to middle-market sales for term and whole life insurance.

To the extent that wage growth cannot keep pace with elevated inflation, the effects may even extend to consumers in higher-income brackets, she added. “We’re also coming off strong life insurance premium growth in 2021 and into 2022. By third quarter 2022, U.S. individual life insurance premium had dropped by 5%.”

Early in the pandemic, there was a boost in premium and policy count when mortality was front and center for many consumers, she added. The economic environment, combined with the pandemic easing, appears to have cooled the excess consumer demand for life insurance.

“In 2022, we are forecasting U.S. life insurance premium sales to be flat, with positive growth in two of five product lines, variable and indexed UL. As corrections continue into 2023, we see the risk of sales possibly being lower than in 2022. A lot of it depends on how the economic environment plays out, but generally we don’t expect strong growth for any life insurance product line,” she said.

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]. 

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