Family offices brace for more uncertainty in 2023

Feb 14, 2023
1 year ago
Crystal ball

It’s a new year, and everyone’s investment returns, donations and other family-office matters are starting fresh. What is there to look forward to in the year ahead? 

We spoke with family-office representatives and other experts to get their take on a range of topics — from economic forecasting and investing trends to taxes and philanthropy. 

The economy: The big wild card heading into 2023 is something no one can predict with great accuracy: where the economy is headed — amid tapering inflation, uncertainty about the Fed’s plans for raising rates, the resilience of the consumer, which direction the housing market will move, and how unemployment and the labor market generally will be affected. 

“We’re already seeing a pandemic-induced bubble in housing burst,” said Diane Swonk, a Chicago-based chief economist at KPMG. That bubble is bursting more outside the largest urban areas, she said. 

Of the 10 cities that saw the largest drop in housing prices in the most recent Case-Shiller results, only four – Los Angeles, San Diego, Phoenix and Dallas – are among the 10 most populous U.S. cities. Given that the housing market generally experiences the largest and earliest effects from changes in monetary policy, it can be a leading indicator of where the broader economy is headed. 

For the economy more broadly, Swonk predicts a Fed-induced recession that will be “short and shallow in the first half of 2023,” on the assumption that the Federal Reserve will be unable to pull off the “soft landing” that Fed Chairman Jerome Powell and others have expressed hope for in public comments — as they fight inflation and simultaneously suppress wages, with higher interest rates. 

Swonk thinks a coming recession can have relatively minor effects “as long as we don’t have this thing become something larger,” leading to defaults in emerging markets or larger portions of the global economy. 

She emphasized that one of the largest factors affecting the economy is still illness. 

“We had 70% more people out sick [in the early fall] than in the beginning of the pandemic,” Swonk said, adding that she’ll continue to keep an eye on COVID, the flu and other disease numbers to get a sense of where we’re going. 

When it comes to unemployment, Swonk said, low levels are related to a labor force that is “about 3.5 million people shy of where we thought it would be,” in part because of 2 million more retirements than expected during the pandemic. Among younger workers, she said, “acute shortages in both child care and long-term care” are keeping many parents — especially women — from joining or rejoining the workforce to the degree they otherwise would. 

Public markets: The large investment banks predict a wide range of potential outcomes for the S&P 500 this year, with Barclays suggesting 3,675 at the low end and Deutsche Bank 4,500 at the high end. That represents a possible drop of 9.7% all the way to a jump of 10.5% from the year-end close of 3,839. 

Of course, the predictions for the year ahead might not be any more accurate than those for last year. In December 2021, analyst forecasts ranged from 4,400 (Morgan Stanley) to 5,300 (BMO Capital Markets), representing a miss of between 14.6% and 38%. 

In bond markets, higher rates will mean higher yields and the opportunity to earn perhaps 4% or more on Treasuries for the time being. Of course, that could trigger a collapse in higher-yield commercial debt, something that bond bears have been waiting more than a decade to see. 

“We’re all excited because we can earn 4% on short-term treasuries and get rewarded without taking any risk,” said Sharon Olson of Olson Wealth Group. 

Philanthropy: We saw record-breaking philanthropy during the pandemic. Will giving slow down now? It’s too early to say and to predict by how much. Nonetheless, we could already be seeing a shift in where donations are going.  

“During the pandemic and over the past couple of years, there’s been much more philanthropic support to core, basic needs — support to sustain welfare and health, not at the sacrifice of other causes but additional philanthropy that has flowed into the space,” said David Fisher, executive managing director of family-office services at Cresset. But now, “we’re beginning to see some pulling back on that, with people focusing on what have been from a historical perspective their personal passions,” Fisher said. 

Regulation and taxation: Predictions about major changes in tax law didn’t come true in the first two years of the Biden administration. And now with a Congress divided between the parties, few expect significant legislation to pass. 

However, one prior regulation coming into focus in 2023 is the Corporate Transparency Act, which will require new reporting. The CTA requires corporations, LLCs and other companies to file a report with the Treasury Department’s Financial Crimes Enforcement Network that includes personal identifying information about beneficial owners and applicants. 

Getting paperwork in order requires a substantial amount of time. Existing entities have until Jan. 1, 2025, to submit their first filings, and new entities have until Jan. 1, 2024. But for those that have relied on corporate structures to maintain some anonymity about their ownership and avoid public scrutiny, the clock is ticking on finding a new model. 

Investing trends: “For me, I’m still in real estate” said Kent Swig of Swig Equities in New York. As prices drop, he said, “I believe that there is great opportunity in the residential marketplace.” 

To go after apartment buildings, Swig is raising a $250 million fund. “Multifamily rental is an exceptional opportunity in select cities, mostly dense urban environments,” he said.  

With lending taking a hit because of high interest rates and a lot of cash sitting on the sidelines, Swig sees 2023 as a time to buy, especially in San Francisco, Los Angeles, Boston, Washington and New York. 

One sentiment shared by nearly everyone interviewed late last year was a mix of eager anticipation and cautious concern for the year ahead. On one hand, some investable assets are going to drop to levels that make them seem a lot more attractive than a year or two ago. However, analysts and investors wonder where a true bottom will be for any given investment. 

In other words: don’t try to catch a falling knife.