Michael Wilson, chief U.S. equity strategist at Morgan Stanley, says the January 2023 rally in financial markets was a “bear market trap.” Wilson notes that the Federal Reserve’s policies may provide significant resistance to growth and that several indicators point to potential trouble for financial markets. Despite January’s market performance, the U.S. economy may still experience significant volatility in 2023.
Recession warning indicators are still flashing.
In the final two months of 2022, consumer spending—the main engine of the economy—declined. On the producer side of the economy, industrial production declined in both November and December.
More specific figures also point to economic decline. Orders for cardboard boxes, a barometer of the health of the economy because they are a major component in consumer spending and shipping, have slowed down significantly. According to data from the Fibre Box Association, U.S. cardboard box shipments declined 8.4% in the fourth quarter of 2022, the largest quarterly decline since 2009 during the Great Recession.
The Federal Reserve continues to tighten monetary policy.
On February 1, 2023, the Federal Reserve raised interest rates by another 25 basis points, or one quarter of a point, to a range of 4.5–4.75%. This was the eighth consecutive interest rate hike by the Federal Reserve since March 2022 and brought interest rates to their highest level since 2007.
The Federal Reserve’s policy is intended to squash inflation. However, there are concerns that the policy could in fact induce a recession. During an interview with Bloomberg News on January 24, 2023, Treasury Secretary Janet Yellen stated that the Federal Reserve’s policies leave recession risk on the table.
Experts are expressing caution in their economic outlook.
Santa Lucia Asset Management CIO James Morton said it is a certainty that the U.S. is entering a recession. In a January 26, 2023, appearance on CNBC’s “Capital Connection,” Morton pointed out that the Conference Board Leading Economic Index, a gauge of future economic activity, fell in the last two months of 2022—and this drop is a signal that has previously predicated recessions.
Jeremy Grantham, co-founder of asset management firm GMO, warned of a potential 50% decline in stocks in a letter to clients published January 24, 2023. Grantham stated that stock prices were well above valuations.
Though markets have rallied somewhat, consumer portfolios may still experience volatility in the year ahead.
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