It was a year that investors will not look back on with great nostalgia, as all three leading benchmark indexes touched bear market territory before paring some of their losses. Year to date, the Dow Jones Industrial Average has declined about 8 percent, the S&P 500 Index has fallen nearly 20 percent, and the Nasdaq Composite Index has tumbled almost 30 percent.
The downward trend in the U.S. financial markets was driven mainly by the Federal Reserve participating in an inflation-busting tightening campaign that involved raising interest rates by about 400 basis points. This resulted in a down year for stocks, precious metals, and cryptocurrencies. Even crude oil erased its 60 percent rally, caused by recession fears amid central banks tightening monetary policy.
Recession Is the Base Case
According to Comerica Wealth Management’s 2023 Market Outlook report (pdf), the base case for 2023 is a mild recession, followed by steady market interest rates and a retest of October lows in the S&P 500 Index. Investors would then “price in a policy response and begin discounting recovery in late 2023 and early 2024.”“Our base case calls for a mild recession in the first half of the year, as full employment, household cash levels, and solid corporate balance sheets help minimize the damage more typically associated with economic downturns,” Comerica officials said in the report. “In this case, we look for the October lows to be retested before the Federal Reserve ends its tightening campaign by midyear.”
Goldman Sachs expects the U.S. economy to experience a soft landing and “narrowly avoid a recession” next year. Bank economists say there is a 35 percent chance of a recession over the 12 months.
“So, this is all to say that barring any unforeseen crises, I hope that 2023 will be a better year for investors with a modest performance likely weighted toward the back half of the year,” Moser told The Epoch Times. “The wildcard is, of course, whether we witness a recession or not.”
Moser noted that markets trend lower in the year leading up to a recession than during the downturn.
The latest data releases suggest that the U.S. economy is at a high recession risk for next year, says Merk Investments portfolio manager Nick Reece. From domestic manufacturing contracting to the household credit cycle potentially turning, “the weight of the evidence currently suggests that recession risk is very high.”
While the threat of a recession could lead to negative implications for equities, Reece doesn’t believe investors are pricing in an economic downturn.
The Stock Market
As for stocks, Goldman Sachs forecasts a bear market for global stocks and “less pain but no gain” for U.S. stocks.“The S&P 500 Index is forecast to turn out flat returns and no growth in earnings in 2023 after declining about 17 percent this year,” the investment bank stated. “Our strategists expect the benchmark to fall about 9 percent in the next three months before rebounding after the Federal Reserve’s tightening cycle ends in May.”
Because of a recession and earnings decline, the stock market could test new lows next year, including the S&P 500 tumbling to 3,200, according to Benjamin Halliburton, founder and chief investment officer at investment research firm Building Benjamins. If accurate, that would result in an 18 percent decline from the Dec. 7 level of 3,933.
Halliburton anticipates that inflation will remain persistent, interest rates will trend higher, and the Fed will maintain its quantitative tightening initiative, with policymakers net selling $95 billion in bonds per month.
“The most important inflection point in investors’ lifetime happened last year,” he told The Epoch Times. “Forty years of disinflation and lower interest rates have been replaced by inflation and higher interest rates. This is the most important investment event for investors to remember.”
In 2023, energy and gold stocks will be the winners, Halliburton predicted. Oil and gas prices would benefit from China reversing its zero-COVID strategy, while gold could hold steady on elevated inflation. He also expects U.S. dollar reserves to come under pressure, as Washington has weaponized the greenback.
That “OPEC +, China, India, Brazil establish a commodity-based trading mechanism” could be another key trend to monitor next year, he added. Could that weigh on the U.S. Dollar Index (DXY), which soared as much as 20 percent this year, before paring its significant rally, in 2023? It might depend on what the BRICS nations—Brazil, Russia, India, China, and South Africa—do, Halliburton said.
Comerica favors value over growth stocks and U.S. equities over international picks for better investment gains next year. It also forecasts that energy and health care could be valuable industries.
Josh Rubin, a portfolio manager at Thornburg Investment Management, thinks emerging markets could recover before developed markets. Emerging market (EM) countries, Rubin noted, employed less pandemic-era stimulus, have become less dependent on trade with advanced economies, and equity valuations relative to local interest rates “look attractive.”
“EM economies are well-positioned to reaccelerate in 2023 and beyond,” he stated in a note. “EM equity valuations have been compressed by high local interest rates and political concerns. The set-up is now reversing, which can also be a tailwind for EM equity valuations.”
Alexander Harmsen, the CEO and co-founder of investment research firm Global Predictions, thinks the base case that investors need to prepare for is a “further sell-off in equity markets before a market bottom and rebound.”
In this environment, traders could seek shelter in safe-haven equities, including consumer staples, health care, and utilities. At the same time, according to Harmsen, investors could seek opportunities in “recovery-oriented stocks,” such as consumer discretionary, industrials, and real estate.
But he does share Reece’s opinion that Wall Street hasn’t fully priced in a recession in 2023.
The ‘Worst May Be Behind Us’?
Despite widespread recession expectations, Gary Thomson, chief operating officer at global forex and CFD broker FXOpen UK, tells The Epoch Times that the U.S. economy might be able to avoid a downturn. Still, the volatility and dynamics of 2021 and 2022 might persist heading into 2023.“It is likely that Europe and Britain will experience a recession, but the United States might just about avoid one. Therefore, the more technology-focused NASDAQ might actually be OK during the course of 2023,” he said.
“As a result, even though we think those assets will struggle over the next few months, we project them to make gains, albeit fairly small, between now and end-2024,” he wrote in a note.
