2023 was supposed to be the year of the recession. Based on history, this made sense because it had been the playbook for previous rate hiking cycles. Nearly every other time the Federal Reserve raised rates to bring down inflation, they have tightened too much and not only brought down inflation but also reduced growth and induced a recession. The Federal Reserve raised interest rates at the fastest clip since the 1980s, 11 times since March 2022. In the midst of these hikes, we saw a regional banking crisis where a few banks collapsed, a war in the Middle East, and an ongoing war in Ukraine. A recession seemed to be baked into the cards.
In early 2023, the overall belief of nearly every economist was that a global recession was right around the corner. Many top strategists on Wall Street predicted a ‘2008-type crash’ in corporate earnings that was supposed to start in the first quarter. Consequently, the year-end projections for the S&P 500 were quite awful. The average target for the 20 largest Wall Street firms (including JP Morgan, Bank of America, and Goldman Sachs) was approximately 4,100 or less than 7% higher for the year. However, stocks rallied throughout the year, and every projection was below where the S&P 500 ended the year at 4,770 or approximately 26% higher.
The consensus recommendation of the top strategists was to sell U.S. stocks, buy Treasuries, and load up on Chinese stocks. Instead, the S&P 500 rallied throughout the year while flirting with all-time highs in late December, and Chinese stocks were down nearly 10%. Not only were the S&P 500 targets wrong, but so too were their recommendations. We still have not seen a recession.
Going into 2023, we did not feel these predictions were accurate or as dire as projected. The consumer continued to show strength, the unemployment rate was near all-time lows, and the economy grew at a fairly solid clip (see Macroeconomic Update). As a result, we remained invested but defensively positioned while riding down the selloffs in March and August through October. In early November, we were buying stock as the market rally picked up steam. It certainly paid off as the markets surged into the end of the year.
Any forecast is simply an educated guess, and just like the weather forecast, they can change quickly and are often wrong. The economy continues to show strength. Inflation is coming down but is above the Fed’s target of 2%. Patience continues to be key, as the Fed will get inflation under control, but it will take time. The consumer is starting to show signs of being stretched, which is something we are closely watching as 4Q corporate earnings begin on Friday, January 12th. As the adage goes, time in the market is always more important than timing the market, but it is prudent to have an umbrella ready since the forecast can change without notice.