Recession fears build as interest rates fall

As if inflation fears were not enough, investors are now becoming concerned that the decline in interest rates, usually a positive for stocks, is now signaling something worse, a coming recession.

It's been a week where corporate management in delivering corporate quarterly results has been sounding a warning that a recession is coming. Many managers are predicting gloomy sales, cost-cutting, and laying off an increasing number of workers.

This constant drumbeat of warnings is influencing investor psychology. Most strategists on Wall Street are convinced that a recession is coming as early as the first quarter of 2023. The only question is whether the economic downturn will be mild, moderate, or harsh. 

For those readers who are interested in my forecast for 2023, you can read all about it in the December 2022 issue of the Berkshire Business Journal, a free publication. "Financial markets face a year of unknowns" https://berkshirebusinessjournal.com/.

I wrote that article the day after the mid-term elections and not much has changed in my outlook. For those who just want the quick and dirty, I expect the first half of 2023 will result in a mild recession, declining earnings, and lower inflation. Fears that the Fed has overtightened, based on a rising unemployment rate, will result in a further decline in the stock markets.

"As such, I see a rather nasty first-quarter decline in the stock markets to fresh lows that could take the S&P 500 Index down another 10%-20% or so from here. I am forecasting a final capitulation in the stock market around the end of March 2023 with a tentative bottom of 3,200.

When do I see the Fed pivot or at least pause in tightening? That depends on inflation, but I do believe it will take several months before the Fed will be willing to relax its policies once inflation begins to fall. That hasn't happened yet. Let's say it does happen over the next six to nine months, sometime in the second quarter of 2023.

If so, I expect the markets will anticipate this change. The U.S. dollar will begin to retreat, interest rates start to decline, and we should see stocks and bonds bounce in the Spring and throughout the summer. For the year, my guesstimate, which will change for sure as the year progresses, is a target of 4,500 on the S&P 500 index. "As for what areas will do well, my forecast for the U.S. dollar, bonds, for interest rates etc., please refer to the magazine article.

In the short term, meaning between now and the end of the year, I am expecting volatility. The expected cooling off of the Producer Price Index (PPI) for November failed to materialize. Prices rose 0.3% over the prior month on a headline basis and 0.4% on a 'core' basis, which excludes food and energy. The market expected no more than a 0.2% increase for both readings.

I warned readers a few weeks ago not to expect that every monthly inflation data point would see a decline. Economic data does usually move in a straight line, so a moderate rise in inflation should be expected. Unfortunately, market algorithmic software programs don't get that. A hotter inflation number simply triggers algo selling immediately.

 The disappointing PPI data leaves open the possibility of a hotter Consumer Price Index coming up next Tuesday, December 13. The following day, the two-day FOMC begins. The direction of the stock market will depend on what the Fed does next week.

As I warned readers, the stock market declined. All the gains made during that last two weeks, after hitting my target range of 4,100., have been given back.  I expect markets will continue to decline over the next week as investors worry about the results of the FOMC meeting.

Depending on what the Fed does, and what Chairman Jerome Powell says, we can decline even further, which could set us up for another bounce. The good news is that if I am right, and the tea leaves in my cup are correct, we could see a Santa Claus rally starting on December 22 (my birthday) or the next day December 23.

Bill Schmick is registered as an investment advisor representative of Onota Partners, Inc., in the Berkshires.  Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI).  None of his commentary is or should be considered investment advice.  Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.