The Big Banks Are Predicting A Downturn

Even though this recession may be one of the most expected in history, it could still be painful. According to Barclays Capital, 2023 will go down in history as one of the worst for the global economy. According to Ned Davis Research, there is a 65% chance of a severe worldwide recession while according to Fidelity International, a hard landing appears inevitable.

  • The consensus view is that a recession, albeit a mild one, will impact both sides of the Atlantic
  • The bar for any dovish policy turn will be high, even though inflation has peaked
  • The Federal Reserve increased interest rates seven times in 2022, raising the benchmark from a 0% to 0.25% range to its current range of 4.25% to 4.50%, a 15-year high
  • Rates will continue to rise, Fed officials indicated in December, to between 5% and 5.5% in 2023

“We expect a downturn in global GDP growth in 2023, led by recessions in both the U.S. and the eurozone,” BNP Paribas economists stated in the bank's 2023 outlook

The Indicators Pointing To A Recession

Wall Street nor the Fed got 2022 right as leading experts on Wall Street predicted a routine year of price growth for stocks and bonds. Nevertheless, economists and asset managers highlight a number of signs for 2023 that have historically predicted recessions:

  • Banks have tightened their lending criteria, and demand has decreased to levels that are more frequently seen during recessions
  • Measures of business activity in the manufacturing and services industry have reached some of their lowest levels since the Covid-induced 2020 recession
  • The yield curve has inverted as short term U.S. government bonds offer higher yields than those with long term maturities, since World War II, every U.S. recession has been preceded by an inverted yield curve
  • According to data from the Fed, the surplus savings that Americans accumulated during the height of the pandemic have decreased to $1.2 trillion from approximately $2.3 trillion

The Stock Market Could Rebound By Year End

By the end of 2023, the S&P 500 is expected to be around 5% higher than it is right now according to the average forecasts. Some, like Barclays and Société Générale, expect the S&P to decline from its current level by the end of 2023.

  • Some economists predict a late 2023 recovery for the economy and the U.S. equities markets, partly as a result of the Fed's switch to rate decreases
  • In general, bonds are expected to offer solid returns in 2023 while stocks end the year somewhat higher
  • The majority of forecasts expect that the Fed will increase rates in the first quarter, take a break in the second, and start lowering rates in the third or fourth

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Benjamin Disinger on Unsplash