Economic Outlook December 2023

Regular readers will recall that I have a favorite saying that runs, “Forecasts have two potential outcomes: lucky or wrong.” Near the end of 2022, we saw a number of projections for 2023 – and when it comes to that favorite saying, those projections are no exception.

Related to the data we track, I pulled several headlines from December 2022:

• Housing Market Doesn’t Need Much for Buyers to Return
• Wall Street Firms Are Cutting Staff to Prep for Downturn
• Energy Will Be Hot Again in 2023. But Now It’s About Dividends
• The Junk Bond Reckoning Is Coming in 2023
• Wall Street’s Top Stars Got Blindsided by 2022 Market Collapse

Analysts’ forecasts missed 2022 projections, and then they set the stage to do the same for 2023 with this headline:

• Wall Street’s 2022 Stock Market Forecasts Were Way Off. Here’s What They See in 2023

At the start of 2022, stock bulls on Wall Street were convinced of one thing: the Federal Reserve would move slowly – very slowly – with its plan to lift interest rates. It was anticipated that rate increases would come in increments so small that financial markets would barely feel them. With few exceptions, the best and brightest in stock and bond markets failed to appreciate how the inflation outbreak would upend the investing world in 2022.

Fast forward to 2023 predictions. As of December 1 last year, the median forecast from 17 strategists for the S&P 500 at the end of 2023 was 4,000. Many strategists predicted something that hadn’t been seen since 1999: the S&P 500 would post an annual decline.

Our own outlook last year cited several factors – including inflation remaining above the Fed’s 2% target, the uncertain lag between Fed rate increases and economic impact, along with the inverted yield curve – as reasons the markets might struggle to gain traction in 2023.

As of this writing, inflation is 3.2%, well above the Fed’s 2% target. The economy’s response to Fed rate increases appears to be marginal, and the yield curve is still inverted. In essence, forecasts can be correct in one aspect, but still be wrong in predicting how the market responds. Which brings up another saying about forecasting: “If a prediction is accurate, but the timing is off, it is the same as being wrong.”

With that in mind and 2024 just around the corner, we are thinking about some events that have the potential to influence market volatility: a presidential election, the possibility of continued geopolitical crises, fed fund rate decisions and inflationary developments, to name just a few.

We still believe that inflation will remain above the Fed’s target in 2024. Timing of the lag between Fed activity and the economic response may become more clear, and we expect the yield curve to flatten in 2024.

Please let us take this opportunity to thank you for your business and be the first to wish you a happy New Year. Look for a more comprehensive outlook for 2024 in our upcoming January report.