The market’s direction will be determined by the prospects of a potential recession, portends an article in Proactive Advisor Magazine. With the Fed widely expected to raise rates even higher into 2023, the likelihood of a recession next year has increased as well.
According to research from Ned Davis Research that is cited in the article, economic outlook is what drives drops of more than 18% and the rebounds that follow, though the article notes that in a recession, the market doesn’t necessarily hit a “V” low. If the Fed continues down their hawkish path, the indicators examined by the team at Proactive Advisor show that a recession has become more and more likely. Liquidity has hit a record low; along with the dip in nominal and real M2 money supply, that would point to a recession, though the article is quick to point out that these levels are usually hit at the end of a downturn and not the beginning. The next indicator would be the inverted yield curve; that would also suggest a recession, though it usually takes time. A third indicator would be a surge in unemployment, and while the rate is at a historic low, hiring plans show that a major uptick in unemployment is on the horizon for next year. Higher unemployment often causes lower demand, which would lead to weaker margins that are often associated with a recession.
Before giving their 2023 SPX operating earnings estimate, Proactive Advisors wanted to factor in the likelihood of a recession; given the indicators in their research, they put the estimate at $220 per share, stating “[w]e want to be careful not to become overly negative toward risk assets because we believe weaker economic data through early 2023 is likely to cause an actual pivot by the Fed” which would presumably result in a more optimistic market environment after the current “fall fall.” As for what investors should be doing now, the article advises against making any significant bets until the Fed offers clear economic data.