Betting on a market bounce? You may be waiting a while

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‘Tis the season for Wall Street strategists to pack their clients’ inboxes with market predictions for 2023.

A lot of what pours in around this time of year is fascinating and rigorous research, but a lot is also moot. It’s simply impossible to predict what will happen over the next 365 days and how that might impact markets: At the end of last year, Goldman Sachs analysts predicted that the S&P 500 would close out 2022 at 5,100 points. Morgan Stanley predicted a more bearish 4,400. The S&P 500 closed on Friday at 3,934.

Market analysts aren’t alone. As International Monetary Fund economist Prakash Loungani concluded in a report on the accuracy of economic forecasts, “the record of failure to predict recessions is virtually unblemished.”

Still, that doesn’t stop experts from trying. Here are some of the major themes emerging as analysts peer into their crystal balls.

Mild recessions: Will the US fall into recession in 2023? Analysts are avoiding or hedging their use of the ‘R’ word but widely see a slowdown in growth, softening of the economy and even “rolling recessions.”

Truist’s base case is for a US recession in 2023 “even though economic growth in the US is expected to remain stronger relative to global peers.” Wells Fargo calls for a “moderate recession in 2023,” based on “a resilient labor market, slowing inflation, and lower interest rates.”

JPMorgan Asset Management’s report says that “while a 2023 recession is quite possible, it should be a mild one if it occurs.” Bank of America Global Research and Citi Global Wealth also forecast “mild recessions.”

Liz Ann Sonders, chief investment strategist for Charles Schwab, writes in her 2023 preview, with Kevin Gordon, that a recession will roll through different parts of the economy, but not all at once. “Although the pain in different segments of the economy gets extended over a longer period of time, you have positive offsets relative to the areas where there’s weakness,” she says.

That will lead to a bumpy market. “US equity returns will be driven by earnings against a backdrop characterized by elevated market volatility,” write JPMorgan analysts.

Inflation will fall… A bit: Analysts seem to believe that a moderate recession in the first half of the year will finally cool sky-high inflation, though it will remain above the Federal Reserve’s 2% target level. Still, most economists think it will be enough for the central bank to ease away from its painful interest rate hikes.

“We believe that a recession and unwinding inflationary shocks of the past 18 months will allow inflation to decline to under 3% on a year-over-year basis by year-end 2023,” write Wells Fargo analysts.

JPMorgan analysts think the Fed will conclude its rate hike regimen by the second quarter of the year. “With inflation continuing to fade and fiscal policy likely on hold, the Fed is likely to end its tightening cycle early in the new year and inflation could begin to ease before the end of 2023,” they write.

Markets make a modest recovery: All of this will lead to a more stable and prosperous second half of the year for markets, analysts believe, and a strong 2024.

By the start of 2024, write JPMorgan analysts, the US economy could be back to where it was in the late 2010s; slow growth, low inflation, moderate interest rates and strong corporate margins. “While this may not represent an exciting prospect for the average American worker or consumer,” they write, “it is an environment that could be very positive for financial markets.”

“In sum,” says Sonders, “worse before better.”

Americans’ wealth continued to slide in the third quarter as stock prices plunged over the summer — but many Americans still have a healthy financial cushion, compared to pre-pandemic times, reports my colleague Tami Luhby.

The net worth of households and nonprofit organizations dropped by $400 billion to $143.3 trillion in the third quarter. The value of households’ stocks declined by $1.9 trillion, while their real estate holdings increased in value by $700 billion, according to data from the Federal Reserve released Friday.

The decline comes after their wealth plummeted more than $6 trillion in the second quarter, which was also driven primarily by a drop in stock prices. Federal Reserve data is not adjusted for inflation.

The third quarter was brutal for stocks. The S&P 500 index fell 5.3% during the period, though it has rebounded since then.

House prices, meanwhile, inched up by just 0.1% in the third quarter, compared to the prior quarter, according to the Federal Housing Finance Agency House Price Index.

Household debt grew by 6.3% in the third quarter at a seasonally adjusted annual rate, slower than in the prior quarter. Home mortgage debt increased 6.6%, while non-mortgage consumer credit jumped by 7.0% — a slower pace for both compared to the second quarter.

The bottom line: Americans are not happy about their financial situation. About half said it’s worse than it was a year ago, while around a third said they’re in about the same financial shape, a new CNN poll conducted by SSRS found. Only 16% said they are now better off.

In CNN’s December 2021 poll, only a third said their finances had worsened over the course of the previous year.

Just two months after UK markets suffered their worst meltdown since the global financial crisis, the British government is promising a major relaxation of financial regulation in a bid to shore up the country’s banking and insurance industries against growing competition from cities such as Amsterdam and Paris, reports my colleague Julia Horowitz.

The UK Treasury unveiled more than 30 measures Friday, dubbed the “Edinburgh Reforms.” These include an effort to make it easier for companies to list shares in London, a rethink of short-selling regulations and a mandate for regulators to take account of growth and UK competitiveness when setting rules.

“We are committed to securing the UK’s status as one of the most open, dynamic and competitive financial services hubs in the world,” Jeremy Hunt, the UK finance minister, said in a statement.

The effort was initially touted as a “Big Bang 2.0” — a nod to the rapid deregulation of UK financial markets under former Prime Minister Margaret Thatcher in 1986. But ministers have moved away from that language, since the reforms are expected to be more gradual.

The changes are a bid to maintain London’s role as a global financial hub after Brexit, which, alongside political turmoil, has boosted uncertainty for companies thinking about where to invest.