I read and listen extensively to “experts” and “economists” who spend a lot of time forecasting what may or may not happen in the economy and markets. Sometimes they’re kinda close, rarely are they right on, and sometimes they are far off. Surprises happen all the time.
What I wish happened is that these forecasters are brought into a panel months or years later to explain why there were so far off! Funny, all that happens is that they make excuses (at most) and then put out more “guesses”. Seldom are they held accountable to their faulty guesses. But when they feel they can justifiably claim they were correct - they pound their chests!
In fact we are entering “Guesses Season” when you can attend nice breakfasts and luncheons when these “guessers” roll out their guesses for 2023 and beyond.
Because we do not have access to the actual future results - this is EXACTLY why diversification is so important.
I present the information below not because we will make big changes to react to it, but more for your curiosity. We have no control over what happens. The only way to enjoy the long returns (including dividends) of the market is to be IN the market.
One article I read expects a “Job-full Recession”. These economists expect some layoffs in 2023 and unemployment may rise from the current ultra low 3.7% to 5% max. That said - still much hiring occurring and job openings. In this scenario there is a mild recession the interest rate hikes stop because of a soft recession, but maybe not enough of a recession that interest rate cuts occur.
Another possibility is a “hard landing” if the Fed believes inflation is being stubborn and goes to a higher level of interest rates before stopping, and the resulting recession is still not significant but not mild.. If that happens, it will lead to interest rate cuts ultimately benefiting bonds. Stocks may suffer some, but then will probably run up if the interest rate environment improves.
Yet another - a “Soft-ish Landing” meaning that inflation subsides but both jobs and overall corporate profitability is subdued but healthy. So far they are subdued and healthy right now. This is what the Fed is hoping for and personally I believe they could achieve it. It would be extremely valuable to the US economy and markets if they were successful since our faith in their work had dropped when they ignored inflation in 2021.
Inflation is interesting as it is part “psychology”. If companies and employers are convinced inflation is entrenched and pay rates are significantly increased, then employers believe they can charge higher prices and you can see how a “spiral up” can occur. I think companies take advantage of this to buoy profits. They use techniques like “shrinkflation” where a product’s price is stable but the amount you receive is less.
I think this is why the Fed has been so emphatically “hawkish” whenever they talk. They want you to see them as relentless in their effort to quell inflation. I think this is working. Quoting one article I read, “Although the Fed was late in raising rates last year (started in 2022 rather than 2021), it is now biased for action and intent on driving inflation down even if a recession occurs. When a central bank does that, it usually gets what it wants.
About 30% of the inflation measures is housing which is a complex formula that incorporates both home ownership and renting costs. It takes a long time for these costs dropping to show up published inflation indexes. There seems to be continued momentum for inflation to continue rolling over. This is one of the most aggressive interest rate hike series our economy has encountered. I think inflation will continue rolling over and that we may get a interest cut or two in 2023. Feel free to hold me accountable. I am not placing bets on my guess of what will happen!