This week I’m covering my outlook for the economy and markets in 2023.

As I mentioned yesterday, the economy seems headed for a recession in 2023, and personally I think it's unavoidable at this point. The Fed must continue raising interest rates this year to squash inflation, and that will bring pain for businesses and households. When borrowing costs are so high, people tend to stay put and not spend the precious cash they have. 

Higher debt costs create reduced profits for small and large businesses alike, and regular Americans like you and I are more reluctant to buy a car, move, or remodel our homes in this higher interest rate and still high inflationary environment. 

All of that equates to a slowing economy and likely a contraction severe enough to lead to a recession. 

Last year, Federal Reserve chair Jerome Powell said: “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

And unfortunately, any pain in the economy also translates to pain for the stock market. The good news is that we’re already a full year into the current stock market decline, with the stock market peaking in early January 2022. Stock market downturns accompanied by a recession tend to last about 18 months. 

So if you judge the current cycle by historical norms, we’ve already been through much of the pain associated with the current downturn.  If it turns out to be a mild recession, we may have already discounted much of the anticipated decline and stocks may not drop much more from current levels. If, on the other hand, we have a more severe recession, stocks would likely test the lows reached back in October 2022 and possibly go lower.

Personally I think we’re in store for worse to come for the stock market. That doesn’t mean that you abandon your long-term investment strategy. That would be a mistake. I’ll talk later in the week about how you can take advantage of opportunities that exist in the current environment and if the situation deteriorates further, but for now, I think it’s helpful to manage your expectations, not get your hopes up too much that things will be vastly better in 6-12 months, and to have patience while this pain that Chairman Powell talks about is fully realized. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast.   

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