While we expect volatility to remain in both stocks and bonds, stocks have better valuations and bonds have better risk and return characteristics compared to the start of last year. After a turbulent year in both stock and bond markets, investors are looking forward to a new year that could see many of the headwinds from 2022 start to subside. Nothing is certain, and timing is always a question, but inflation is widely expected to ease at some point next year.
Looking at leading economic indicators, the risk of a recession increases midway through 2023. The good news is that we expect a potential recession to be mild. Consumer balance sheets are strong and consumer debt levels are manageable. And the labor market, which will likely continue to weaken, remains strong. Currently, there are two job openings for every person looking
Investors have already largely accounted for the possibility of a recession by discounting asset prices. Economic growth estimates and corporate earnings projections have been lowered, and we know that this is the natural cycle of the economy. The hard part is that the conditions that cause the cycle are always different than the last but, nevertheless, studying past cycles may help us glean insight into a projection for 2023 and beyond.
The key take aways from studying past recessionary periods is that the S&P 500 index is the quickest reacting entity to economic conditions. The index moves downward well before GDP (the key of economic growth or contraction) has peaked. After initially heading down, the index bottoms well before we see full earnings deteoriation, payrolls become weak, and before we see an uptick in post recession economic activity.
Where are we now?
We've already seen Q1 and Q2 GDP meet the standard market of a recession and begin to roll over, and we have the S&P 500 index well off of it's all-time highs. At this point, we are watching the same thing the Federal Reserve is: payrolls and earnings. All of these factors contribute to the low bar being set for 2023.
Creating a slow growth landscape
While the playing field for 2023 is full of uncertainty we believe that the Fed is setting the stage for long-term, slow growth. At the end of the decade long bull-market, companies were enabled to be frivolous in their spending. Easy money policies created the wobbly foundation and fattened the calf for slaughter. Now that the punchbowl has been taken away form the party it is common for businesses to become more focused on efficiency and cost-cutting. This can lead to increased automation and technological advancement, which can in turn contribute to higher long-term productivity levels. We are hopeful that the next period of economic expansion will be just as great as the last, and the U.S. economy will continue to be the bellwether of the world for the foreseeable future.
Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. No recommendation should be inferred from any information presented in this article. A diversified portfolio does not assure a profit or protect against loss in a declining market.