Ethan Morgan
Managing Director
Market Manager Orange County
J.P. Morgan Private Bank
In 2022, most things that could have gone wrong for investors did.
Markets that entered the year with extended valuations buckled under high inflation, an aggressive global rate hiking cycle, and the war in Ukraine.
However, Orange County weathered the storm better than other markets. Our diverse and educated workforce left 2022 with a December unemployment rate at 2.5% compared to the national rate of 3.5% for the same period.
That being said, we still believe a recession is on the horizon which will not only herald in lower rates and wider credit spreads but force inflation to fall through 2023 and into 2024. Nevertheless, we don’t expect a downturn anything like the Great Recession.
While it’s promising that inflation is slowing, prices are still high. This leads us to believe that the Federal Reserve will probably raise rates at least once or twice more before taking a pause.
Policy rates are already restrictive and causing key segments of the economy, such as housing, to slow.
In Orange County, we are seeing high demand for homes, but simply not enough inventory as homeowners are happy to sit on their low mortgage rates and wait for the economy to level. Overall getting inflation back to the Fed’s 2% mandate looks set to be bumpy and bring volatility along the way.
Optimistically, bond yields are back above where they began the year, providing another opportunity to add to fixed income, and we think there are still pockets of value in the stock market:
• Fixed income: Core bonds remain attractive, and the move higher in yields provides an even better entry point. We see opportunity to lock in elevated short-term yields or look to extend duration to protect against a potential recession.
• Equities: The rally so far this year might offer an opportunity to protect gains through hedges that offer downside protection. Further, the recent strength in mega-cap tech provides a chance to take some profits and diversify across regions through Europe and China, as well as across styles with U.S. small- and mid-caps.
• Private markets: Alternatives remain essential for diversification, alpha generation and access to longer economic shifts. As inflation remains elevated, infrastructure funds may provide important protection against price increases. Opportunities in private credit and special situations also stand to benefit as growth slows and dislocations arise.
Richard Cabrera
Head of Corporate and Commercial Banking
Umpqua Bank
In Orange County, we see companies trimming their revenue forecasts, but savvy operators are really emphasizing efficiency, laying the groundwork for future growth and greater competitiveness. Companies continue expecting a tighter economy and many are adjusting to account for an overall drop in revenue—20% seems to be a common forecast assumption.
There are of course exceptions to this, such as construction firms working on large infrastructure projects, healthcare being relatively immune to business cycles, and a robust recovery of the travel and leisure sector. Regardless of industry, companies realize they have to do more with less, meaning they have to focus on efficiency and automation.
On the positive side, the Federal Reserve’s interest rate hikes over the last year have helped cool the rate of inflation, including real estate price increases. Meanwhile, the computer chip shortage has greatly improved to where Orange County manufacturers can resume normal operations. They have scaled back production plans because orders are down, which ultimately means there is currently demand for fewer loans and less appetite for acquisitions in the short term. This period of uncertainty reminds me a little of the early days of the pandemic: the best companies are focused on their customers and business models, knowing they will not only survive any downturn, but also find opportunities for gaining market share and acquiring competitors at value prices down the road. Now is the time we see the best companies preparing for the next phase of growth.
Joseph Holsinger
Managing Director
Merrill Lynch Wealth Management
Senior Market Executive for Greater
Orange County
For a variety of reasons, most Orange County residents were more than happy to turn the page on 2022 from a financial perspective. With the Federal Reserve hiking rates in response to accelerating inflation, U.S. and global stock and bond markets had a particularly difficult year.
The outlook for the economy in 2023 is uncertain, and much depends upon how resilient the economy remains at a local level and how high the Federal Reserve raises interest rates. Our chief investment officer believes if indeed we were to experience a recession in 2023, that it would be shallow.
Currently, while interest rate increases may feel negative for traditional investments such as real estate or for lending needs, there are other investment vehicles and indexes that do very well in the current high interest rate environment that can pay strong returns, such as municipal bonds and treasuries. This is why having a financial adviser can be so important during these more volatile times.
As a matter of fact, our Orange County advisory teams are engaging with clients at record levels—reviewing financial plans and progress toward clients’ medium and long-term goals. In fact, financial planning discussions increased significantly in 2022, up 40% over the prior year—and at a five-year high. We anticipate these discussions between advisers and clients will continue to increase in 2023.
Given the challenging markets, we are having more conversations with our clients around tax loss harvesting. While traditionally a fourth-quarter discussion topic, advisers and clients have been increasingly employing it year-round with help of Merrill’s Tax Efficient Management overlay strategies.
We continue to recommend following a disciplined plan, remaining diversified with high quality common stocks and bonds within their portfolio, and—for qualified investors—to include alternative investments in order to help mitigate volatility and to pursue risk adjusted returns over a sustained time frame.
Daniel Walker
CEO
F&M Bank
The Orange County economy, while strong, will not be immune to the impacts expected in 2023. With inflation affecting everyone at the gas pump to the grocery store to the pharmacy, recession is imminent. But nothing long term. The cause will be inactivity, not a declining market.
Drivers affecting 2023 will be:
• The end of both the national emergency and the public health emergency declarations related to COVID-19 on May 11, 2023. This will mean no more government support for COVID-19 vaccines and boosters, leaving insurance companies and private parties to pay higher prices for the preventative care that was free, until now. We are hopeful this will not lead to increased public health outbreaks affecting workforce attendance.
• A fluctuating unemployment rate due to current overstaffing.
• The end of any remaining eviction moratoriums, leading to increased rents from landlords looking to recover lost funds or take immediate collection of lost funds from existing tenants.
• Increased utilities expenses; for some, their gas bill has doubled.
In banking, we are seeing a slowdown in residential lending caused by higher interest rates and pressure on the cash flow of the purchaser. There is pressure to pay higher interest rates on deposits, up from nearly zero in the last 12 months. Commercial lending is coming to a halt because interest rates are now two times more than a year ago. Rising costs of construction due to inflation are leading to borrowers opting out. Banking will be challenged in 2023.
At F&M Bank, we will continue to invest in technology that increases efficiency, convenience, and security for our clients—protecting their deposits and their privacy. We will continue our traditions and focus on improving our communities through philanthropic dollars. F&M Bank continues to concentrate on long-term relationships with our clients and support of our clients.
At the onset of the pandemic in 2020, F&M Bank made the decision to keep every team member employed, and that is what we will continue to do in 2023.
Jarrod Ingle
Regional President
Head Corporate Banking
Orange County/Inland Empire
PNC Bank
The Orange County economy continues its gradual recovery from the pandemic-induced recession in early 2020.
Employment levels in Orange County at the end of 2022 were just slightly below pre-pandemic levels, while nationally, employment is about 2% higher than prior to the pandemic. So relatively speaking, Orange County is in good shape.
We believe the biggest problem for the Orange County economy in early 2023 is not demand for workers, but the supply. The local labor force—the number of people working or looking for work—is about 1% smaller now than it was before the pandemic, making it difficult for businesses to find workers and increase output. This challenge remains true for companies across all sectors.
Currently, the local economy is benefitting from continued national growth. Orange County’s tech firms are expanding, thanks to strong demand from businesses looking to be more productive and lower costs relative to our northern neighbors in Silicon Valley. However, the growth of these businesses is slowing, leading to layoffs and reduced labor. As a coastal region, Orange County’s important tourism industry is benefitting from the historically strong national labor market, stimulus support for household incomes and a return to leisurely travel after the pandemic, although high inflation impacted consumer spending in 2022.
We do foresee some challenges in Orange County in 2023. With the Federal Reserve continuing to raise interest rates this year in an attempt to slow inflation, we expect OC tech firms will see sales drop as investment-related spending declines; local venture capital spending also is expected to take a hit from higher rates.
The local housing market is already slowing because of higher mortgage rates and low affordability after price increases over the past few years. Job losses nationally will weigh on leisure travel in Orange County impacting local tourism.
Challenges aside, we believe over the long run Orange County economic growth will be above the national average. Investment spending and travel is expected to rebound with a U.S. economic recovery. The area’s favorable location in Southern California, highly educated workforce, and access to capital will continue to draw firms to the area, despite high business costs and taxes, and expensive housing.
The Orange County economy has always shown resilience and when faced with challenging times—we always overcome the storm. As I see development and innovation springing up across the county every day, and more in the pipeline, I’m optimistic about our region’s future.
Michael Bennett
Managing Director
BMO Commercial Bank
Orange County is known for its diverse economy, with a focus on industries such as technology, healthcare, tourism and real estate. That diversity has helped it withstand recent economic turbulence. As of early 2023, Orange County’s economic climate remains relatively strong, but it’s facing some challenges due to the ongoing impacts of the pandemic and the looming prospects of a recession.
One of the key indicators of the region’s economic health is its unemployment rate, which as of December stood at 2.5%, well below the national average of 4.1%. This figure represents a significant improvement from the height of the pandemic in 2020, when unemployment rates in Orange County were as high as 13.5%. However, the county’s job growth rate has slowed in recent months, with some sectors experiencing declines in employment.
One of the main challenges facing Orange County’s economy is the lingering effects of COVID-19, which has had a significant impact on industries such as hospitality and tourism. Many hotels and restaurants in the area have struggled to attract customers, and some have been forced to close their doors permanently. As a result, the leisure and hospitality sector has experienced a decline in employment in recent months. However, other industries such as healthcare, technology and professional services have continued to grow.
Another challenge is the high cost of living in the area, particularly when it comes to housing. The median home price in the county is currently around $950,000, which makes it difficult for many workers to afford to live here. At the same time, a shortage of affordable housing can make it difficult for businesses to attract and retain employees.
Despite these challenges, there are reasons to be optimistic about Orange County’s economic future. The area’s technology sector has been a bright spot in recent years, with many startups and established companies expanding their operations in the region. The county’s healthcare sector is also poised for growth, due to an aging population and a high demand for medical services.
Overall, while Orange County’s economy is facing some challenges in the current economic climate, the region remains a hub of innovation and opportunity, with a diverse mix of industries driving growth and creating jobs. It will be important for the county to remain agile and adaptive to changes in the economic landscape.
