By this time last year, every stock market forecast made for 2022 was wrong. The U.S. stock market peaked on the first trading day of 2022 and went downhill from there.
This year, every forecast made for 2023 could pan out. Heightened volatility. Early rally. A downturn mid-year is certainly possible. Recession this fall and winter is also possible. A soft landing for the U.S. economy? Could happen.
The National Association for Business Economics’ most recent outlook survey showed that economists can’t agree on anything, from how high the Federal Reserve will raise interest rates to how long rates stay elevated and when cuts should begin, to what would trigger rate cuts and more.
Fed Chairman Jerome Powell contributes to the divergence of opinions by always attaching the words “data dependent” to any tip of his hand, meaning we can’t know exactly what the central bank is planning without knowing the next key economic indicator, and the one after that (and the one after that).
The array of potential scenarios that experts can describe for inflation, monetary policy, macroeconomic momentum, corporate earnings and geopolitical risks is a reminder of why investors shouldn’t base financial decisions on predictions.
If you do give weight to predictions, avoid the sweeping trend forecast and watch for the pivot point that, once reached, could determine which strategies win and lose in 2023.
Zed Osmani, portfolio manager at Martin Currie Global Portfolio Trust, said in a recent interview on my podcast, “Money Life with Chuck Jaffe,” that he expects “a healthy bull-bear debate about whether central banks will be pivoting in 2023 or 2024.”
He is looking at any pivot “in terms of magnitude, which leads to volatility in markets remaining high because of this array of potential scenarios and bull-bear debates, across inflation, across monetary policies, across the cycle and whether we are heading into a recession or whether we avoid one.”
Typically, disagreement makes a market; the compelling arguments lead to buyers and sellers moving prices based on sentiment. Nowadays, disagreement is putting the market on hold, waiting for an answer to just how far the Fed must go to defeat inflation.
Jurrien Timmer, director of global macro at Fidelity Investments, said on my show this week that where the market was expecting the Fed to raise rates into the 4% range, it is now looking at rates at 6% and maybe higher.
“These levels were unthinkable a year ago,” Timmer said. “The markets are handling it, but it’s a delicate balance because the stock market can look through a recession — provided it’s not a financial crisis [and] that it doesn’t last too long. It can look through an earnings decline provided it is … a 10%- or 15% decline.”
Getting over the bumps, Timmer added, requires “the promise of easier liquidity conditions, which is why … the market has rallied on the hopes of a pivot from the Fed. … but the prospect of a pivot is being pushed further and further out.”
Living with higher inflation
The pivot point that few people are talking about now is when the Fed decides that it can live with more inflation than it’s been saying. The central bank states that it wants to get the rate of inflation down to around 2%, and everyone takes that as the primary mission statement driving its actions.
But with unemployment at record low levels and the economy still humming along in spite of inflation and other conditions that should be creating slowdowns, there is a real possibility that to avoid a hard landing for the economy, central bankers will have to accept an inflation rate above 2%. That’s the forecast experts are thinking of, but not yet willing to suggest.
Said Timmer: “If inflation gets down to 2.5 or 3, the Fed will declare victory and say ‘That’s good enough, we slayed the dragon,’ but I don’t think the Fed is anywhere close to saying that at current levels.”
Lacking that kind of policy change, investors should be holding to whatever they believed in and expected on New Year’s Day. The market’s rally hasn’t changed anything. Neither have the technical indicators — which flashed green during January but have started flashing red — suggesting that the rally was simply a respite in the bear market.
That isn’t comfortable for most people, because those forecasts weren’t made with a lot of confidence. Many investors simply picked their favorite forecast based on feelings rather than strong conviction of how things would play out.
For now, if the market and economy haven’t changed your mind about what’s next, muddling through until you get a better indication may be your best move — even if it’s a clumsy one.