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There has never been a recession so widely forecasted in the history of modern finance as the potentially upcoming 2023 recession. The Federal Reserve has done an outstanding job of letting every investor and trader know exactly what they are going to do and then doing it throughout the entire sell-off in 2022.
Forecasted 2023 Recession
Despite their rate hikes and hawkish commentary, the stock market is holding up relatively well with the Dow Jones Industrial Average back above its 50 and 200 simple moving averages. In fact, as of Tuesday’s close, the Dow Jones Industrial Average was less than 10% off its all-time highs set in 2021.
That performance is good news for investors in mega-cap stocks. The bad news for investors is that the S&P 500 and Nasdaq are lagging.
In up-trending market environments, these indices will lead the Dow Jones Industrial Average. The leadership in the Dow Jones Industrial Average compared to the S&P 500 and Nasdaq indicates two things:
First is that the mega-cap market is not doing as poorly as the investing public believes it is.
Second is that the leadership of this index versus the S&P 500 and Nasdaq does hint that we should expect a 2023 recession as the mega-cap stocks have a history of leading during a recession.
Should Investors Worry about a 2023 Recession
Is this 2023 recession something we should all worry about?
It depends on where you are invested.
Most recessionary periods are very volatile for stocks. However, the stock market has a history of bottoming during recessions. The market also has a history of bottoming shortly after the Fed starts cutting rates.
As of right now, the Fed is still hiking short-term rates and we have not entered a “real” recession. When you have unemployment at 3.7%, you’re not in a “real” recession. 5% unemployment is the magic number. When you are above this number with two sequential negative GDP readings, you’re in a “real” recession. If unemployment is below 5%, it’s considered a “soft” recession.
Following Tuesday’s lower than expected CPI reading, it does appear that inflation is abating, and it is possible we will soon see peak interest rates following the February meeting. The Fed hiked rates another 50 basis points on Wednesday, and I expect another 50 basis points in February. That is when the Fed will probably halt their rate hikes and see if inflation continues to come down. If that happens, it will not be long before the Fed starts lowering rates.
Once that happens, it’s simply a matter of time before the market returns to an uptrend. Sometimes the stock market bottoms during rate hikes. That is what happened in 1994. Once the Fed started cutting in 1995, it was already trending higher. Most of the time, this is not the case, and it is after the Fed cuts rates that the market bottoms.
When is the Market Bottom?
How do you know when the stock market has officially marked a bottom?
You do not know until after the fact. The way I know is that the day any of the indices hit a new high 0.01 above their 2021/2022 highs, we’ve bottomed.
The great news for active traders and investors is that leading stocks will be hitting new highs well before the market hits new highs, and they leave their marks via their price and volume characteristics.
There are many stocks currently hitting new 52-week highs. When and if the market bottoms next year, these will be the stocks that go on to make explosive gains. It happens every recession. Just like it did in 1982, 2002, 2008, 2020, and possibly after the 2023 recession.
The bottom line is that the Fed has done a fantastic job at forecasting this recession and has given everyone an opportunity to prepare for it. This should be a soft recession and not a “real” recession within a secular bull market.
Stay positive. This too shall pass. Like it always does.
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