Top 10 predictions for 2023

A recent wave of positive data metrics on the health of the economy has prompted some market pundits to predict the beginning of a new “Bull Market,” and that we should not concern ourselves with talk of a recession. The economy showed resilience in the 4Q posting growth of 2.9% after growing 3.2% in the 3Q. The closely watch Personal Consumption Expenditures (PCE) deflator came in at 5.5%. In the 4Q22 personal consumption gained 2.1%, after posting growth of 1.4% in the 3Q22. For FY23, the Fed is projecting GDP growth of 0.5% year-over-year (YoY.) The probability of a recession in late FY23 now stands at 65%.

The U.S. jobless recovery continues to be very buoyant; in January, non-farm payrolls added 513,000 new hires compared to December’s additions of 223,000 new workers. However, hourly wage growth (+4.4%) has not kept up with the monthly Consumer Price Index (CPI) (+6.4% in January) compressing consumer spending. The labor participation rate has fallen to 62.4%, compared to 66% during last major recession/recovery cycle.

In response to the recent strong data points, the Federal Reserve at their Federal Open Market Committee meeting in February decided to raise the target range for the federal funds rate to 4.5% to 4.75%. The Committee anticipates that ongoing increases in the target range will be appropriate to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time. This leaves the door open for another hike at upcoming March meeting.

Fed policymakers are now projecting the Federal Fund (FFUND) rate will rise to 5.1% by year-end 2023 and 4.1% by year-end 2024. The Fed now sees the PCE at 3.1% in 2023 (PCE 4Q22 +5.5%). Remember, historically the Federal Reserve will not stop a tightening cycle until the FFUND rate and PCE deflator intersect! That would place the FFUNDs peak at about 5.25%-5.50%. So, what can we make of all these cross currents? In response, I thought it would be timely to put together a list of “Top 10 Market Predictions for 2023.”

Top 10 Predictions for 2023

1. Inflation will be sticker than predicted…remember Wall Street’s favorite slogan of “Transitory?”
2. Higher oil and food prices will continue to squeeze consumer spending…retarding GDP growth.
3. The Fed will pivot once the Federal Fund’s rate intersects the PCE Index…but not as soon as the market is predicting!
4. The Bear market in bonds should stabilize.
5. S&P 500 Analyst Earnings estimates are overly optimistic leading to downward revisions.
6. Neither a Hard or Soft Landing is priced in the market…so pick your poison.
7. Stocks will not bottom until housing data and Fed policy reverse.
8. An unexpected event like an escalation in Ukraine/Russia or Taiwan/N. Korea conflicts could ambush the markets.
9. Expect little stimulus out of Washington with a split Congress.
10. The three I’s will continue to incumber the market:
• Interest Rates (“Don’t Fight the Fed”)
• Inflation (Highest since 1982)
• Inverted U.S. Treasury Yield Curve

Daniel Morgan, Senior Portfolio Manager