Back in March I posited the notion that the S&P 500 would need to fall to about 2,900 before all of the froth that the Federal Reserve had injected into the market through its various monetary stimulus programs dating back to the Great Recession had finally burned off.
On Christmas Eve the S&P closed at 3844, which would put it 19% below its all-time high of 4,766 on December 27, 2021, or about a year to the day.
In recent days some market prognosticators have been warning that the market is poised to fall another 20%, which would put the index at about 3,000, or slightly above my guesstimate.
So do I feel vindicated, if that is the right word? No, and I hope I’m wrong anyway.
First, my guess was not a prediction, just a quick back-of-the-envelope calculation based on my assumption that the Fed was responsible for about half of the stock market’s 600% gain between the March 2009 bottom of 683 and the time I made my comment.
So, if we cut that 600% gain in half, that would reduce the S&P’s gain to a still respectable 300%, or a little below 3,000.
Not an educated estimate, maybe, but I thought a reasonable guess—a worst case scenario, if you will.
Second, we don’t know if these bears will turn out to be right. I hope they’ll be wrong.
I now believe the Fed won’t have to drive the economy into the tank in order to get inflation down to where it wants it to be, probably in the 2.5% to 3% range.
Remember, about two years, in what was considered to be a major policy shift, the Fed said it was willing to let inflation “overshoot” its long-term target of 2% for a time, as it indeed it did.
Now it looks like inflation is dropping a lot faster than most people thought, and the Fed itself is now forecasting that inflation will fall to 3.1% next year before declining in 2024 to 2.5% and 2.1% in 2025, i.e., putting it at its long-term target.
That, to me, is a reason to be positive about the market and the economy. Inflation is, in fact, coming down, and fairly quickly.
Of course, my March “forecast” didn’t assume that the solons at the Fed would see it that way. As we know, the Fed is often wrong, by wide margins and in terms of timing. Which is one big reason why the market has shown a predilection in the past few months to not believing the Fed when it makes a statement about monetary policy and inflation.
Why should it? We’ve been told countless times to “don’t bet against the Fed” or “follow the Fed,” even when our gut tells us it’s all wet.
So my latest “prediction” is that we are a lot closer to the bottom in stocks now than another 20% drop would warrant, and that 2023 could be a good year for the market.
As I noted in my previous column, there are many reasons to be optimistic about inflation. As the Wall Street Journal reported last week, “The Covid-19 pandemic might not be gone, but the global supply-chain crisis it spawned has abated. Goods are moving around the world again and reaching companies and consumers… Gone are the weekslong backlogs of cargo ships at large ports. Ocean shipping rates have plunged below prepandemic levels.”
“Chip inventories swell as consumers buy fewer gadgets,” another Journal article proclaims. “Semiconductor companies slash production plans amid weak demand. The world is now awash in chips.”
The Fed has already raised interest rates close to what it says will be their end point. Gasoline prices have plunged despite the ongoing war in Europe. Used car prices have declined. Home sales have plummeted. Rental prices have dropped, to the point where builders are holding back on adding more supply.
The main reason why inflation held so low and for so long—technological developments that increased productivity and competition—continue to benefit us.
The only institution that has not gotten the disinflationary message is the U.S. government, which continues to spend as if we are in constant crisis mode. Witness the recent passage of the $1.65 trillion omnibus bill, which apparently few people in Congress actually read even as they passed it, and President Biden will no doubt be happy to sign.
Can we expect any fiscal restraint when the Republicans take over the House next month? Probably not, but at least gridlock may constrain reckless fiscal spending at least a little bit.
Conclusion: The Fed’s job is almost done, barring some new unforeseen crisis. That should give us some optimism for 2023.
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
4 thoughts on “My Latest "Prediction" For 2023”
So what is the 2023 New Years Eve S&P? That being said let’s look for 3900 from this camp. At least I give the bears warning because the Feb meeting will be a launching pad driven by Industrials and Tech still in the tank. The cloud overcapacity is a killer. The bottom third of our economy will see little recovery. Visa and Mastercard will grow earnings from credit card debt climbing because the free money in most households is gone. Bonds are king until June. Then we rip higher.
Nice one George.
But it’s the market that predicts the economy, not the other way round.
As J.K. Galbraith said, “there are two kinds of forecasters:- those who don’t know, and those who don’t know that they don’t know”.
Arthur. What are your thoughts.
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