Quarterly Economic Update from Human Investing
It’s a new year, and there are still plenty of old questions about the economy & markets. We thought diving into some questions about today’s economy would be helpful.
2023 Economic Outlook
Many different sources (See Table 1) forecast a recession for 2023. With The Fed combating inflation by raising interest rates, expectations are these moves will force the economy into a downturn. The extent of the recession may depend on The Fed’s actions. If inflation recedes quickly, and The Fed cuts rates or stops raising them, that could minimize a recession or possibly avoid a recession entirely—this is called a “soft landing.” If inflation persists, and The Fed is determined to lower inflation in the face of a declining economy, the recession could be worse. However, market forecasts expect The Fed to cut rates in 2023 in response to a recession. The Fed has yet to forecast those same rate cuts. Based on our observations, the odds are we will experience a mild recession in 2023.
2023 Investment Outlook
Despite the prospects of a recession, investments grow over the long run, and volatility is expected. As we’ve previously covered, it can take years for your portfolio to recover from a downturn. We have always seen markets recover to new all-time highs. With a looming recession, 10-year forecasts for US stocks remain positive.
Downturns present a buying opportunity for investors, particularly workers accumulating for retirement. Continuing to purchase when stocks decline is an excellent investment. Saving more when times are tough is challenging. Ensure you are in good financial shape: have 3-6 months of expenses saved in an emergency fund, pay off any high-interest debt, and consistently spend less than you make. Then consider increasing your savings. Increasing your contribution rate is a wonderful forced savings tool if you have a 401(k) or similar plan.
Markets and the Economy
You may have heard the market is forward-looking. We know the market is a flawed prognosticator because prices still adjust daily to reflect new information. Let’s examine how closely market bottoms coincide with recessions.
There have been 11 recessions since 1950, according to the National Bureau of Economic Research (NBER). Using the NBER’s trough dates (i.e., the end of a recession), we can compare GDP with the S&P to see when both hit their lowest point. Looking at Table 3, the S&P 500 tends to do one of two things:
The market is at its worst about the same time as the economy.
The market is at its worst approximately six months before the economy bottoms out.
There are some caveats. Market data is live, and markets are open every business day. GDP data comes out quarterly, advance estimates come out nearly a month after the fact, and aren’t fully revised until around 60 days after initial release. For both the market and economy, knowing when you’ve hit bottom is nearly impossible to determine in the moment. Because it’s difficult to know when the worst is over, we recommend staying invested amidst the potential short-term tumult.
Be prepared for some turbulence this year
Economists and market prognosticators are expecting there will be a recession in 2023. The severity of the recession will vary depending on The Fed. The Unemployment rate remains below historical averages at 3.5%. In November 2022, there were nearly 6 million more job openings than job seekers, suggesting the economy can handle some tightening. Trying to time the market or economy bottom remains a guessing game. Long term, the outlook for returns is still strong. Be prepared for some turbulence this year, knowing you are headed in the right direction long term.
Sources
1. Federal Reserve Bank of New York. The yield curve as a leading indicator. January 2023.
2. The Wall Street Journal. Economists in WSJ survey still see recession this year despite easing inflation. January 2023.
3. Bloomberg. Economists place 70% chance for US recession in 2023. December 2022.
4. Vanguard. Vanguard economic and market outlook for 2023: Beating back inflation. December 2022.
5. BlackRock. 2023 global outlook. January 2023.
6. Charles Schwab. 2023 market outlook: Cross currents. January 2023.
7. Fidelity. Global outlook 2023: New world disorder. January 2023.
8. Charles Schwab. Schwab's 2023 long-term capital market expectations. January 2023.
9. Vanguard. Market perspectives: December 2022. November 2022.
10. BlackRock. Asset return expectations and uncertainty: as of September 2022 November 2022..
11. Data courtesy of YCharts & NBER