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The U.S. stock market has risen about 15% from its nadir in mid-October this year, while expectations that the U.S. economy will fall into recession next year are getting higher and higher.
Economists see a 63 percent chance of a recession next year, the Wall Street Journal survey found. Gross domestic product is expected to decline in three to four quarters, the most since it began in 1968, according to a survey of economists and investors by the Federal Reserve Bank of Philadelphia.
Tech giants are laying off a wave of layoffs. Amazon and Meta, the parent company of Facebook, have laid off tens of thousands of employees, and Twitter’s layoffs have reached 80%. However, the unemployment rate in the overall economy remains at a fairly low level. The U.S. economy added 263,000 jobs in November and the unemployment rate held at 3.7 percent, roughly unchanged from the previous three months, suggesting the job market remains strong.
“There are various signals in the market right now,” Ataman Ozyildirim, senior director at The Conference Board, told me. By the middle of next year.”
Ataman Ozyildirim explained that the main reason for the economic downturn is the Federal Reserve’s interest rate hike. Rising loan interest rates have slowed down the real estate and manufacturing industries. Although the unemployment rate is still relatively low and income is rising, it still cannot offset the interest rate hike. the impact.
The inversion of the 10-year and 2-year U.S. bond yields reached the largest range in 40 years in early December, and the spread reached 1.992 basis points at one point. This usually means a recession in the economy. CFRA Research predicts that the S&P 500 earnings per share will decline year-on-year in the fourth quarter of 2022 and the second quarter of 2023, and will grow by less than 1% in the first quarter of 2023, which also implies that a recession is imminent.
Still, “the recession that is likely to come will not be comparable to the recession that hit in 2020,” Ozyildirim said. “It will be a normal recession.”
Yung-Yu Ma, chief investment officer of BMO Wealth Management, believes that the economy may achieve a soft landing in 2023. The job market may not be so strong, but the economy is still stable and quite healthy. And the wave of layoffs in the tech industry may not spread to the broader economy.
While recent layoffs by tech giants have been massive, with the number of tech layoffs soaring to more than 50,000 in November, according to website Layoffs.fyi, more and more big companies are emphasizing the need to cut costs. But that’s mostly because of overexpansion during the pandemic. After layoffs, many companies remain similar or larger than they were before the pandemic. Of the West Coast companies with the most layoffs in November, only Twitter and Lyft reported headcount reductions compared to 2019. Despite the turnover, employment at many companies remains above or near pre-pandemic levels. For example, Meta’s headcount is still 64% higher than in 2019.
Of course, CEO pessimism is on the rise after a year of economic uncertainty. The Business Roundtable’s latest quarterly survey of top U.S. business leaders, released last Monday, found that U.S. companies’ hiring plans were down 17 percentage points, capital investment plans were down 7 percentage points and sales expectations were down 8 percentage points compared with the previous quarter. .
“I do think they’re concerned,” Yung-Yu Ma told me. “There’s more uncertainty going forward, especially now that interest rates are higher and everybody’s talking about a recession. But practically, I think For most companies, that means hiring fewer people rather than mass layoffs. Corporate growth and earnings may be lower in the quarters ahead, but I don’t see a significant drop in revenue.”
According to S&P Capital IQ’s forecast, the S&P 500’s earnings per share will rise 3.2% in 2023, down from 5.1% in 2022, but EPS growth will rebound to 10% in 2024, excluding energy, Progress will be made in all areas.
At a time when the economy is slowing down, the Fed’s policy direction is of particular concern. The current Fed rate is between 3.75% and 4%. Federal Reserve Chairman Jerome Powell has indicated that it is possible to slow down the pace of interest rate hikes. The market generally expects to raise interest rates by 50 basis points in December and a small rate hike early next year. But at the same time, Powell also reiterated that restoring price stability will be difficult and long-term, and whether inflation can be controlled is the key. The newly released U.S. CPI rose by 7.1% in November, significantly lower than October’s 7.7%, the lowest increase since the end of 2021. With the economy facing a recession and inflation showing signs of falling, will the Fed cut interest rates in 2023 as some predict?
Probably not.
Although the market’s short-term inflation expectations have declined for two consecutive quarters after rising for two consecutive years since the second quarter of 2020. However, the 10-year inflation expectation is still at a high level and has an upward trend, which is far from the Federal Reserve’s statutory target of 2%. Not to mention the possibility of a mild recession with unemployment remaining at a historically low 3.7%. The dual responsibilities of the Federal Reserve stipulated by Congress are to control inflation and ensure employment. For the Federal Reserve, in the case of low unemployment rate, controlling inflation is the most important goal. There, the odds of a rate cut in 2023 are low.
“I think the Fed should continue to raise interest rates,” Chen Shuquan, president of the hedge fund Discerene Group, told me. “If history is any guide, we should know from the experience of the great inflation in the 1970s that inflation is very difficult to control. The Fed We must ensure that inflation can be fully controlled before considering cutting interest rates.”
Yung-Yu Ma also said that the most likely scenario for the Fed is to raise interest rates and then keep the federal rate at a certain level for quite a long time.
“I think the Fed will be patient,” Yung-Yu Ma said. “The 2 percent inflation target is more difficult to achieve. Controlling inflation is not a matter of the next few quarters but a matter of the next few years.”
The Conference Board expects the Federal Reserve to continue raising interest rates next year after raising interest rates by 50 basis points in December, and the federal interest rate will reach between 4.75% and 5% by the end of next year.
“Of course it depends on inflation and unemployment and other relevant economic data. It is too early to discuss whether to cut interest rates.” Ataman Ozyildirim said, “The Fed also needs to understand the length and depth of the economic recession. The more serious and longer-lasting ones, there will be no discussion related to rate cuts until the second half of next year.”
Given the Fed’s continued interest rate hikes and a possible recession, will U.S. stocks continue to fall into a deeper bear market in 2023 or is the S&P 500 around 3,500 at the end of September the lowest point in this cycle?
“We see higher risks to the downside,” Jason Draho, head of U.S. asset allocation at UBS Global Wealth Management, told me. It is still in an adjustment period, and there will be large fluctuations.”
Although the downside risk is higher, Jason Draho believes that unless there are extreme circumstances, the possibility of falling below the 3500 point at the end of September is low.
Yung-Yu Ma believes that the stock market at the end of September at 3,500 points is already the bottom point of this round.
“I don’t think the market will go down that far, but it doesn’t mean it will go straight up,” he said. “Until the economy and corporate earnings stabilize, it will be difficult for the stock market to rise significantly.”
Chen Shuquan expressed uncertainty about whether the stock market has passed its lowest point and when it will bottom out. For value investors, a market sell-off is an opportunity to buy.
“All I know is that now is the time to buy good companies at low prices,” he told me. “It’s not that the market won’t go lower, and if it goes lower, buy more.”
(This article only represents the author’s point of view. Responsible editor email: [email protected])