December was tough on the markets, but they bounced back to start the year. In January, all US indices showed gains, international markets fared better and bond markets had a strong rally. All in all, it’s a good start to 2023 after a very difficult 2022. So, what does this positive news mean for the recession ahead and the market outlook? Let’s take a closer look.
Falling rates boosted market gains
In January, the benchmark yield on the 10-year US Treasury note fell by almost a full half-point to 3.5 percent. This ongoing decline in long-term interest rates, coupled with a continued decline in inflation, has led to recent market gains. Now, inflation is expected to fall further and markets are betting on the Fed slowing or pausing its rate hikes. Generally, expected lower rates mean higher bond and stock prices—and that’s what we’ve seen.
Signs of an economic slowdown
Despite the positive market news, it’s a different story for the economy, which has shown signs of slowing down. On the one hand, job growth has been healthy and economic growth has exceeded expectations. On the other hand, consumer spending fell for the second month in a row, while business confidence and investment also retreated. Accordingly, a recession looks likely this year and is the main risk we face as we head into 2023.
But there is good news here too. Any recession is likely to be minor. The job market is still strong and consumer confidence is healthy. Therefore, the impact on the average person should be limited. Moreover, a mild slowdown could be positive for markets if it encourages the Fed to pause rate hikes. Of course, no one wants a recession. But what if we’re going to have one? Now is the best time of all.
A good year ahead?
And that’s how we’re starting the year: inflation seems to have peaked, interest rates are down, and while we’re probably headed for a recession, it should be mild. Overall conditions are favorable for the markets this year. 2023 may be better than 2022, maybe for a while.
That said, there are risks beyond the pending recession at play. Here in the US, politics is a major concern, with the debt ceiling conflict at the top of the list. Internationally, we don’t know how China’s economy will recover from Covid-19. That unknown and the ongoing Ukraine war are keeping commodity markets on edge. And, of course, there are risks we haven’t seen yet. We’re definitely not done with the mayhem.
As we look forward—despite the risks—the signs are that things will be better six months from now than they are today. The debt ceiling dispute will be resolved. We know where we are with the recession. And inflation and rates should continue their decline. While things have the potential to improve, downside risks have over time, which is where we are right now.
Not a bad place to be
Overall, we’re not in a bad place to start the year. The risks are real, but we’re moving most of them into more positive territory. As we have seen, market confusion is common. But as investors, we need to keep looking at our long-term goals. The year ahead, despite the real concerns, looks positive.