Across Wall Street, finance workers of all stripes are returning to work after skiing, gallivanting around the Caribbean, or just visiting Mom for the holiday season. But as they settle in at their desks and turn on their trading terminals, they’re in for a rude welcome: The market is already making a mockery of their big predictions for 2023.
Around the time everyone starts listening to Mariah Carey’s “All I Want for Christmas Is You,” Wall Street’s phalanx of analysts and economists participate in their own annual tradition: rolling out long jargon-packed reports predicting what’s to come in the year ahead. These forecasts are supposed to make everyone involved — the analysts, the firms, the clients — look and feel as if they have some grasp on the future. They help create a veneer of stability: “Keep giving us your money; we’ve got this under control.” And when the world is actually stable, some of these predictions may hold up for a quarter or more. Some analysts may even get a call or two totally correct.
But 2023, like the past few pandemic-afflicted years, is already proving to be not a normal, stable year, and some of finance’s biggest predictions are souring as quickly as a carton of milk.
Rates and recessions
Wall Street’s collective predictions for the US economy paint a general picture of overaction and overreaction. Most analysts expect that the Federal Reserve’s campaign to get inflation under control by raising interest rates will prove effective but overzealous, triggering a recession during the first half of the year. This economic stumbling, the consensus goes, will force the Fed to drastically reverse course and lower interest rates in the second half of the year to avoid a more severe economic meltdown and massive job losses. And while the first part of that equation will be bad for the stocks, the support the Fed will have to inject into the system will (eventually) help the market get on better footing toward the end of 2023.
In short: Thanks to the Fed’s clumsiness, things will get very bad for the market and the economy for a while, and then they will get much, much better. Or as the prognosticators at Amundi Asset Management put it, 2023 will be a “two-speed year.” Deutsche Bank’s analysts broke it down similarly: “The recession we have now been anticipating for nine months draws nearer. Our expectation for a recession in the US by mid-2023 has strengthened on the back of developments since last spring.” Bank of America was even more blunt: “Going into 2023, one expected shock remains: recession.”
But reality is not acquiescing to these proclamations. Instead of a series of painful swings, the data is pointing to a smoother cooldown. This month we learned that the US economy added 223,000 jobs in December, job openings are sticking near record-high levels, and, despite headlines from the tech industry, layoffs remain incredibly low — not exactly a recipe for a recession. Plus, the Federal Reserve Bank of Atlanta is forecasting that fourth-quarter GDP could come in at as high as 4.1%. This kind of growth, taken together with lower energy prices and softening inflation data, is good news and certainly doesn’t scream “recession is coming.”
That takes care of one half of the prediction. In Wall Street’s telling, the Fed is going to ratchet up interest rates until they break the economy and get forced into a hasty retreat. Take it from BlackRock Investment Institute’s forecasters: “A recession is foretold; central banks are on course to overtighten policy as they seek to tame inflation.”
But there are clear signs that the price surges are already easing up. The latest consumer-price-index report said prices actually declined by 0.1% in December from the month before and were up by 6.5% from the year before — high, but well below the peak of 9.1% in July. And instead of making gung-ho proclamations about breaking inflation’s back, some Fed officials were already softening their stances after the CPI report, suggesting the central bank could hike by just 0.25% at its meeting in late January instead of a half percentage point, which isn’t the series of extremes Wall Street is predicting.
Of course, there’s some uncertainty in all this, and Wall Street could still be proved right. After all, the Fed is unlikely to declare “mission accomplished” until inflation gets down to its 2% target and stays there. As the Apollo Global Management economist Torsten Slok pointed out in a recent note, if the market “concludes that ‘inflation is coming down, so everything is fine,'” the Fed may have to hike rates more aggressively to ensure prices don’t start ticking back up again. Raphael Bostic, the Atlanta Fed president, told reporters he wants to see the labor market and wage growth cool off some more before the Fed stops hiking rates.
But in order for Wall Street’s dramatic hike-then-cut prediction to come true, the Fed would have to jack up rates so high that something in the economy breaks, forcing an immediate course reversal. That could still happen, but we’re not seeing that strain in the data yet.
Already some Wall Street economists are revising their predictions given the strong economy, even if they’re not backing off their priors quite yet. At Bank of America, the economics team revised its forecast on Tuesday, writing that its “outlook still includes a mild recession, but we now expect it to start later and come with lower peak unemployment” due to “durability in consumer spending, strong labor markets, excess saving, declining energy prices, and easier financial conditions.”
A weird world
The world’s weirdness — pandemic, war, commodity-price convulsions, energy scarcity — has also prompted Wall Street to take a very dim view of the economic outlook for Europe, going so far as to forecast a deep recession. Analysts at Goldman Sachs think US resilience will contrast with a recession in the European Union. Fidelity described a recession in the UK and Europe as “almost certain.”
It’s hard to blame these analysts given the striking change that Russia’s war on Ukraine has brought to the continent, principally the spike in energy prices. What the data is showing us so far is that eurozone economic activity is still slow, yes, but not as slow as analysts feared. Early this month the region’s S&P purchasing managers index, a composite of business activity, came in at 49.3 — still below 50, which shows a contraction, but above November’s reading of 47.8 and analysts’ expectations of 48.8. We’re still in the woods, but they may not be as dark and deep as we thought, especially if commodity prices continue their slide downward and weather in Europe remains unseasonably warm.
Perhaps the one place where Wall Street is too sanguine is the Chinese economy. Like swallows returning to Capistrano, Wall Street is yet again predicting a return to normality for Beijing, a song it has found a reason to sing for years now. This time the bull case rests on the idea that the end of Beijing’s zero-COVID policy means the Chinese economy will fully bounce back from the pandemic and investing in the country — the China trade, as it’s called — is back on.
Bank of America’s forecast argued that while recessions would grip the rest of the world, China’s bounce-back would be a “notable exception,” adding that the country’s reopening would be a “reprieve.” Pictet Asset Management called for a “China rebound.” Principal Asset Management ventured to say the rebound would be “strong.” Schroders recommended buying Chinese and Hong Kong equities.
There are a couple problems with this idea. First, without “zero COVID,” China is just left with COVID. The pandemic is still suppressing growth. Officials claim that cases have peaked in large cities, but it’s impossible to know with certainty because they’re not releasing case numbers. The evidence we have of the pandemic’s ravages is anecdotal — satellite imagery showing crowds forming outside busy crematoriums, and rural doctors saying they’ve never seen so many sick people before.
What’s clear is that the government is looking desperate when it comes to the economy. In a recent note, China Beige Book pointed out that China’s most worrisome long-term economic problems remain. Its largest growth engine and asset class, property, is still getting slammed. That has all sorts of ripple effects throughout the economy, such as starving local governments (which sell land to property developers) and depressing commodity prices for construction. So, in response to the pandemic, Beijing has eased restrictions it had placed on the property industry to stop it from overheating and taking parts of the country’s financial system with it. It’s a risky move.
Desperate economic times call for desperate economic measures. It may take years to get the Chinese consumer, on which Wall Street has placed so many hopes, back to the strength of yesteryear. As the China Beige Book analysts wrote, “economic acceleration is not imminent and, when it does begin in the second quarter, will come from a low base by the standards of the past 40 years.”
Don’t hatchet your chickens before they count
To be fair, not every Wall Street analyst is looking sheepish right now. While the consensus calls of just a month ago are looking more obsolete with every new data point, the folks over at UBS Asset Management are probably feeling pretty good about where they sit.
“While a recession is a very real possibility, investors may be surprised by the resilience of the global economy — even with such a sharp tightening in financial conditions,” they wrote in their look-ahead. “The labor market will certainly cool, but healthy household balance sheets should continue to support spending in the services. Moreover, some of the major drags on the world economy emanating from Europe and China are poised to get better, not worse, between now and the end of the first quarter of 2023.”
Almost a decade ago, when I started reporting on the economy, a legendary hedge-fund manager caught me on TV making a grand prediction about the year ahead. They immediately admonished me. The difference between analysis and prediction, they said, is the difference between knowledge you can know and knowledge you can’t know. There are too many independent variables at play to forecast what will happen to the world and the market over an entire year. Our tiny human minds can only break it down in pieces. Grumble, grumble, “predicting motherfuckers,” the hedge-fund manager complained.
Economic conditions were simpler and stabler in 2014, but commanding that analysis was still a stretch of Wall Street’s imagination. In 2023’s more complicated landscape, anybody caught making a prediction — myself included — should be prepared for the moment the market hands them a red rubber nose and some floppy shoes. The beclowning is already happening, and it will happen all year long.
Linette Lopez is a senior correspondent at Insider.