Is a U.S. recession or economic recovery in store for 2023?
Risk: With inflation peaking at 9.1% in June, a recession is now the No. 1 economic concern going into 2023. When businesses make less money due to lower consumer spending (triggered by dwindling reserves, price pressures and an aggressive Fed), companies lay off workers and more people are hesitant to spend. Weak expectations or prior over-investing also factor into the equation, with many firms feeling that large swaths of the economy could, or are already, experiencing worsening macro forces and a series of unknown variables (war, pandemic, energy prices, etc.).
"The new year is going to be tougher than the year we leave behind," said Kristalina Georgieva, Managing Director of the International Monetary Fund. "Why? Because the three big economies - U.S., EU, China - are all slowing down simultaneously. We expect one-third of the world economy to be in recession. Even countries that are not in recession, it would feel like recession for hundreds of millions of people."
Opportunity: Many corporations haven't slashed their profit forecasts, while hiring remains surprisingly robust and the unemployment rate is sitting near historical lows at 3.7%. If that resilience holds up and inflation continues to cool down, a soft landing could be in the making. The Fed also won't hike interest rates to the moon (and has even begun to take its foot off the accelerator), which could mean that somewhat of a slowdown is in store, but not one that slams the brakes on the economy.
"The U.S. may avoid a downturn in part because data on economic activity is nowhere close to recessionary," according to Jan Hatzius, chief economist at Goldman Sachs. "GDP grew 2.6% (annualized) in the third quarter," while the country added 261,000 jobs last month. "Even as financial conditions have tightened, the rise in real income is likely to be the stronger force next year. Unlike other bouts of high inflation, supply chains are normalizing as will housing rental markets - a source of disinflation that wasn't there during the 1970s - while spending is rotating from goods to services and inventories are rebounding.
Will central banks begin to pivot?
Risk: While inflation has eased recently, it is still way higher than the central bank's desired 2% target. "We will stay the course until the job is done," Fed Chair Jerome Powell declared at December's policy meeting, while ECB President Christine Lagarde added that, "we're not pivoting, we're not wavering." Last month, the Fed even raised its benchmark interest rate to the highest level in 15 years, and some fear that heightened geopolitical risks or uncontrollable events could happen again, causing inflation to spring back and return to its upward ascent.
"Inflation forecasts were nowhere near high enough in 2022, and there's no reason to believe they'll be materially better in 2023. There's more risk of a high-side surprise," BMO Capital Markets macro strategist Benjamin Reitzes said in a research note. "In the future, it seems likely that supply chains will be shorter, more diversified and more resilient. Trade will likely narrow to more trusted partners and these changes will increase resilience, but at the cost of efficiency. And through this adjustment, production costs could rise, increasing price pressures."
Opportunity: The Fed raised rates seven times in 2022, pushing its benchmark from a range of 0% to 0.25%, to the current 4.25% to 4.50%. However, smaller increases were implemented in December and officials signaled that they only plan to keep raising rates to between 5% and 5.5% in 2023. Better outlooks are already materializing, with many seeing the Fed continuing to raise rates in the first quarter, pausing in the second and possibly cutting rates in Q3 or Q4.
"Slowing demand, price discounts due to elevated inventories and declining housing prices, among other factors, will help temper inflation, which should in turn prompt major central banks to pause and assess their recent historic string of rate rises," Morgan Stanley wrote in its 2023 Global Macro Outlook. "As consumer goods' supply chains recover and labor markets see less friction, we could see a sharper and broader fall in inflation, which would imply a somewhat easier path for policy and higher growth globally."
What will the year look like for stocks?
Risk: "Don't fight the Fed," is alive and well, with equities coming off a bruising year. Curtains have closed on the easy money era as investors demand cash generation and revalue unprofitable growth companies. Predicting a bottom is tough and many wouldn't be surprised if volatility still remains the name of the game. According to a recent analysis from 34 SA contributors, stocks are not likely to rebound in 2023, with the median expecting the S&P 500 to end the year at 3,799 (-1.0%) and the average seeing the benchmark index at 3,755 (-1.2%).
Many contributors predict that the S&P 500 will bottom-out at a much lower level than it is today, sometime in mid-2023, followed by some sort of rebound. The most optimistic forecast for the S&P 500 for 2023 is a rise of +35.8%, while the most pessimistic contributor who submitted a prediction for 2023 expects the index to close at 2685, or -30.1% lower. The Seeking Alpha Quant Rating for the SPY (SPDR S&P 500 Trust ETF) is also a Hold.
Opportunity: Some are more bullish on stocks, especially when looking at individual sectors. They highlight last year's outperformers, like energy (NYSEARCA:IYE) and defense (BATS:ITA), as well as insurance players (NYSEARCA:IAK) and some basic materials (NYSEARCA:SLX). When polled in late December, more than 62% of the over 2,400 respondents to Wall Street Breakfast's "Survey Monday" said that they would tilt most of their investments to equities in 2023, compared to cash (17.4%), bonds (12.2%), commodities (5.5%) and crypto (2.8%).
Elazar Advisors, author of Fed Trader, predicts the benchmark S&P 500 Index will rally some 20% to end the coming year at 4,520. "Recession is unlikely, inflation will drop, and interest income will add to the economy and help drive stocks higher," writes ANG Traders, Marketplace author of Away From The Herd. Also, check out the analysis and The Fortune Teller's Predictions For 2023.
Source: Seeking Alpha
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv
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Fortem Financial
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