Market uncertainty: What we have not yet seen

A rapid “change of weather” for the economy appears on the horizon. Looking ahead to 2023, we also expect a likely 10% decline in US corporate earnings.

We have changed our scenario weightings to 10% Robust, 20% Resilient and 70% Recession.

The US Federal Reserve is fighting inflation with a potent combination of higher interest rates and Quantitative Tightening. They are moving very quickly, so fast that the impact of their tactics is not apparent, yet. The Fed’s speed will also diminish its ability to counter policy mistakes.

The rough end to 2022 and the likely uncertain entry for 2023 is a mere “moment” in the life of an investor’s portfolio. If you knew for sure you were going to have a recession, you might think that selling stocks would be a good idea as losses would come quickly. Yet, it turns out that during pre-recessionary periods when the yield curve has been inverted, the US stock market has, on average, gone up by 3%. However, in the 6 and 12 months after a recession has begun, stock performance has been negative 5% and 3%, respectively, with a wide range of possible outcomes.

While uncertain, we believe the chance is high that the economic “bottom” will become visible by the end of 2023.

In this Bulletin, we cover what we have not seen yet, the forward impacts the Fed may have across industries and the broader economy. Our purpose here is to prepare investors for what is likely to come in the next six months and help them avoid shock.