With the U.S. stock market on track for its biggest annual decline in more than a decade, fears that efforts by the Federal Reserve and other major central banks to curb a spike in inflation could trigger a major economic downturn have come to the fore as the calendar shifts to 2023.
Here are three recession scenarios for an economic slowdown and the potential market reaction:
Asdeep and brief recession
Many analysts believe the economy has enough inertia to grow slowly until at least the first half of 2023.
“To be sure that a recession would pay off for equities, but given the resilience of the harsh US economy and the tight labor market, we expect a slowdown or a shallow and brief recession,” he said. said Nancy Tengler, CEO and Chief Investment Officer of Laffer Tengler. Investments. “This could allow equities to rally in the second half of 2023 (after a volatile first quarter) as they head into recession.”
Tengler said the current market consensus is too pessimistic because the consumer still has bandwidth and spending will hold up better than naysayers predict in the tight labor market.
US employers It hired more workers than expected in November and raised wages, dismissing most concerns about a recession. The November jobs report showed the economy gained 263,000 jobs last month, beating Wall Street expectations, with the jobless rate holding steady at 3.7%, remaining near a low of a half-century.
However, job growth is expected to slow in 2023 as rising interest rates dampen investment and as more industries fully recover to their pre-pandemic workforce, but according to Julia Pollak, chief economist at ZipRecruiter, this kind of “substantial cooling” in labor market conditions is far from recessive.
the Congressional Budget OfficeThe estimate shows the number of employed Americans will increase from 158 million in 2022 to 174 million in 2052. Pollak said the economy should be “comfortable with an even lower number of job gains in coming years “. These projects imply net job gains of only 45,000 jobs per month on average over the next 30 years, in the absence of increased population growth in the United States.
Mark Luschini, chief investment strategist at Janney Montgomery Scott, thinks the stock market is likely to bottom before the recession actually begins, with anticipation of the “eventual recovery” on the other side.
“We expect equities to struggle and continue to be under pressure over the next few months or a quarter or two, before finally establishing a more sustainable lead, perhaps in the second half of next year,” Luschini told MarketWatch by phone.
He attributed the economic resilience to the “healthy balance sheets” of individuals and households, which have accumulated an “abundance of savings” during the pandemic.
See: Did 2022 smash wall street fear gayouge? Why the VIX no longer reflects the sorry state of the stock market
Aswamp” recession
While many forecasters believe a recession in 2023 will be mild and brief, and will be followed by a strong economic recovery, a JP Morgan strategist said the economy is likely to struggle .
David Kelly, chief global strategist at JP Morgan Asset Management, argued that rather than falling off an “economic cliff”, such a recession would look more like an “economic swamp”, meaning it would be difficult for the economy to rebound. . of this one.
The good news is that a prolonged period of economic slump should stifle inflation and force the Federal Reserve to reverse a significant portion of its 2022 monetary tightening, Kelly wrote in a note from november.
“However, the flip side is that a mild recession would likely not create much additional pent-up demand and, assuming we see only a modest increase in unemployment, the resulting increase in employment and income of a fall in the jobless rate would also be below normal, he said.”Perhaps most importantly, unlike each of the last four recessions, there is unlikely to be any significant fiscal stimulus to reinvigorate the economy.”
Wall Street analysts have warned stock market investors that They should not expect any form of “Fed put” next year.
No recession or a small technical recession
Goldman Sachs economists have doubled down on their call that the U.S. economy is likely to make a soft landing, meaning the central bank could tame inflation without delaying economic growth. They also expect the economy to narrowly avoid a recession as inflation wanes and unemployment rises slightly.
“Our economists say there is a 35% chance that the United States will slip into recession within the next year, an estimate well below the median of 65% among forecasters in a Wall Street survey. Journal,” Goldman Sachs economists said in their report. Outlook 2023. “The United States could avoid a slowdown in part because economic activity data is far from a recession.”
After two consecutive quarters of negative gross domestic product (GDP) growth in early 2022, the US economy extended to third trimesterwhich is growing at an annual rate of 2.9%, according to government data.
Consecutive quarters of GDP contraction are often described as a “technical recession,” although the National Bureau of Economic Research, which serves as the arbiter of the business cycle, has a much broader definition of recession.
See: Those five trading days accounted for nearly all of the S&P 500’s losses in 2022
U.S. stocks were on track Friday to end the year not far from their 2022 lows in what is expected to be the worst year since 2008.
The S&P 500
spx,
was down 19.2% year-to-date as of Thursday’s close, the penultimate trading day of the year. Meanwhile, the Dow Jones Industrial Average
DJIA,
fell 8.6%, while the Nasdaq Composite
COMP,
has fallen 33% so far this year.
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