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Stock market investors face 3 recession scenarios in 2023

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With the US stock market on track for its biggest annual decline in over a decade, fears that efforts by the Federal Reserve and other major central banks to curb a rise in inflation will trigger a major economic slowdown have moved on as the calendar advanced. moves to 2023.

Here are three recession scenarios for an economic downturn and possible market reaction:

Likesacred and brief recession

Many analysts think the economy has enough inertia to grow slowly through at least the first half of 2023.

“To be certain of a severe recession would be bearish on equities, but given the resilience of the US economy and tight job market, we would expect a slowdown or shallow and brief recession,” said Nancy Tengler, CEO and chief investment officer. by Laffer Tengler. Investments. “This could allow stocks to rise in the second half of 2023 (after a volatile first quarter) as they look down the recessionary curve.”

Tengler said the current market consensus is too bearish because the consumer still has bandwidth and spending will hold up better than bears predict in the tight job market.

US employers hired more workers than expected in November and raised wages, brushing aside most worries about a recession. The November jobs report showed the economy added 263,000 jobs last month, beating Wall Street’s expectations, with the jobless rate holding steady at 3.7%, remaining near a half-century low.

However, job growth is expected to slow in 2023 as higher interest rates hurt investment and as more industries fully recover their pre-pandemic tally, but according to Julia Pollak, economist- head of ZipRecruiter, this kind of “substantial cooling” in job market conditions is far from recessionary.

The Congressional Budget Office estimate shows that 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 even smaller numbers of job gains in subsequent years.” These projections imply net job gains of just 45,000 jobs per month on average over the next 30 years without an increase in US population growth.

Mark Luschini, chief investment strategist at Janney Montgomery Scott, believes the stock market is likely to decline before the actual onset of the recession, with an anticipation of the “eventual recovery” on the other side.

“We expect equities to struggle and remain under pressure for the next few months or a quarter or two before finally settling on a more sustainable advance, 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, who had accumulated “abundance of savings” during the pandemic.

To see: 2022 broke Wall Street’s ‘fear meter’? Why the VIX no longer reflects the sorry state of the stock market

Likewamp” recession

While many analysts think 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 to pull itself out of it.

David Kelly, chief global strategist at JP Morgan Asset Management, argued that rather than falling off an “economic cliff”, this recession would be more like sliding into an “economic swamp”, meaning it would be difficult for the economy to recover. to recover. from that.

The good news is that a prolonged economic morass should extinguish inflation and force the Federal Reserve to reverse a significant portion of its 2022 monetary tightening, Kelly wrote in a November note.

“However, the flip side is that a mild recession would likely not create much additional pent-up demand, and assuming we only see a modest increase in unemployment, the increase in employment and income from a falling unemployment rate would also be less than the “Perhaps more significantly, in contrast to each of the past four recessions, there is unlikely to be any significant fiscal stimulus to re-energize the economy.”

Wall Street analysts have warned stock market investors not to expect any form of “Fed put” in the coming year.

To see: Is there a stock market recovery in 2023 after the 2022 sell-off? What history says about consecutive losing years.

No recession or a minor technical recession

Economists at Goldman Sachs doubled down on their view that the US economy is likely to hit a soft landing, meaning the central bank could tame inflation without hurting economic growth. They also expect the economy to narrowly avoid a recession as inflation subsides and unemployment rises slightly.

“Our economists say there is a 35% probability that the US will enter a recession within the next year, an estimate well below the 65% average among analysts in a Wall Street Journal poll,” Goldman Sachs economists said in their outlook for 2023. “The US may avoid a slowdown in part because data on economic activity is nowhere near a recession.”

After two consecutive quarters of negative gross domestic product (GDP) growth in early 2022, the US economy expanded in the third quarter, growing at an annual pace of 2.9%, government data show.

Consecutive quarters of GDP contraction are often described as a “technical recession,” although the National Bureau of Economic Research, which acts as the arbiter of the business cycle, has a much broader definition of a recession.

To see: Those five trading days accounted for almost all of the S&P 500’s losses in 2022

US stocks were on track on Friday to end the year not far from their 2022 lows, in what is expected to be their worst year since 2008.

The S&P 500 SPX,
-0.80%
it was down 19.2% year-to-date through the close of Thursday, the penultimate trading day of the year. Meanwhile, the Dow Jones Industrial Average DJIA,
-0.71%
fell 8.6%, while the Nasdaq Composite COMP,
-0.89%
down 33% so far this year.

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