4TH QUARTER NEWS

We liked a financial column we saw which talked about the large number of “known unknowns” facing the economy and financial markets in 2023. Most important, no one really knows how hard it will be to reduce inflation or whether the U.S. economy will experience recession.

Given the uncertainties, Wall Street forecasters are all over the place for 2023. The average forecast expects the S&P 500 to end 2023 at 4,009 – up slightly from 3,839 at year-end 2022. But the predictions range from a low of 3,400 to as high as 4,500 – the widest discrepancy since 2009. Much of the diversion relates to differing viewpoints of what the Federal Reserve will do in 2023. We see this debate daily on CNBC.

At Hudson Advisors, we believe in the old wisdom: “Don’t fight the Fed.”  To us, the Fed has been quite firm and consistent in its intention to stamp out high inflation and get back to its target range of 2%. That intention was reflected in the minutes of the most recent Fed meeting which suggested that Wall Street should not underestimate the anti-inflation policy. We think the Fed would like the so-called ‘soft landing.” But it will tolerate a modest recession if necessary.

We are waiting for the “unknowns” to be more known. Our view is on the plus side of neutral with regards to the market outlook. It will take until mid-year for the inflation/recession dynamic to be clearer. The stock market will be unsettled for the first half of the year. It may start to recover in the second half if the economic news is good. In this environment, as always, we seek to protect client money and look for future opportunities.

The Economy: The pandemic recovery has created some quirky economic reporting. The U.S. GDP was technically negative in the first two quarters of 2022 – but was not labeled a recession. The economy is expected to have about 2% growth for the full year when the final numbers are tabulated. One clear trend has been a robust labor market with over 4 million jobs created in 2022. While recent months show some cooling, the unemployment rate remains an historically low 3.7%. Consumer spending has also been strong.  spurred in part by pandemic household savings.

Economists are quite divided in their outlook for 2023. One camp sees a shallow but brief recession that would come in the second half of the year as result of the Fed’s monetary tightening. A second camp sees a more complicated “swamp recession” which may take a year or two for recovery. A third camp supports the soft-landing idea in which the economy slows but avoids recession. We obviously will be watching the economic tea leaves each month to see which scenario unfolds.