Could A Recession Be A Positive For The Markets?
December was tough on the markets, but they bounced back to begin the year. In January, all of the U.S. indices showed gains, with international markets doing even better and bond markets having a strong rally. All in all, it was a good start to 2023 after a very hard 2022. So, what does all this positive news mean for the possibility of a recession ahead and for the market outlook? Let’s take a closer look.
Declining Rates Drove Market Gains
In January, the benchmark yield on the 10-year U.S. Treasury note dropped by almost a full half-point, to below 3.5 percent. This ongoing decline in longer-term interest rates, coupled with the continued drop in inflation, drove recent market gains. Now, inflation is projected to decline even further, and the markets are betting on the Fed slowing or pausing its rate increases. Typically, expected lower rates mean higher bond and stock prices—and that is just what we’ve seen.
Signs of an Economic Slowdown
Despite the positive market news, it was a different story for the economy, which showed signs of slowing. On one hand, job growth remained healthy, and economic growth beat expectations. On the other, consumer spending dropped for the second month in a row, while business confidence and investment also pulled back. Given that, a recession looks likely this year, and that’s the principal risk we face as we move into 2023.
Even here, though, there is some good news. Any recession is likely to be mild. The job market is still strong, and consumer confidence remains healthy. So, the impact on the average person should be limited. Moreover, a mild recession could actually be a positive for markets if it encourages the Fed to pause rate increases. Of course, no one wants a recession. But if we’re going to have one? Now is about as good a time as any.
A Better Year Ahead?
And that is how we are starting the year: inflation looks to have peaked, interest rates are down, and while we are probably facing a recession, it should be mild. Overall, conditions are favorable for markets this year. 2023 is likely to be better than 2022, maybe by quite a bit.
That said, there are risks beyond the pending recession in play. Here in the U.S., politics are a major concern, with the debt ceiling confrontation at the top of the list. Internationally, we don’t know how or whether the Chinese economy will rebound from Covid-19. That unknown and the ongoing Ukraine war are keeping commodity markets on edge. And, of course, there are the risks we don’t yet see. We are certainly not done with turbulence.
As we look ahead—despite the risks—signs are that things will be better six months from now than they are today. The debt ceiling confrontation will be resolved. We will know where we are with a recession. And inflation and rates should continue their decline. When things are likely to get better, the downside risks tend to be contained over time, which is where we are right now.
Not a Bad Place to Be
Overall, we’re not in a bad place to begin the year. The risks are real, but we are increasingly moving past many of them, into more positive territory. As we have seen, market turbulence is normal. But as investors, we should keep looking at our long-term goals. The coming year, despite the real concerns, does look positive.
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