We believe the beginning of 2023 will likely bring a recession and more stock market declines — perhaps beginning between now and the end of January, forecasts Monty Guild, money manager and editor of Guild Investment Market Commentary.
Since this recession will likely end in late 2023 or early 2024, and the market will discount the economic upturn by 6–12 months, we think stocks can likely rally later in 2023.
This is the history of almost all recessions for the last 60 years. If the recession were to end by April 2024, we would probably see the market bottom between July and October 2023. What will a recession do to emerging markets, developed markets, currencies, bonds and stocks?
Commodity-producing countries may have a tougher time than those which produce goods and services for export. Domestic growth will be more difficult for all emerging countries, because higher interest-rate costs will make real estate and industrial expansion expensive.
High and rising labor costs will impact the richer countries in the emerging world, especially China; China will outsource more manufacturing to Vietnam, Cambodia, Thailand, Laos, the Philippines, Bangladesh, and other nearby countries. China will have the world’s highest nominal GDP growth at about 4–5% — but inflation-adjusted GDP growth will be negative.
The U.S., Canada, Australia, Europe, Japan, Taiwan, Korea and developed Asia will experience a recession in 2023. Lower commodity prices will make this a recession of average severity — not the hardest, not the easiest.
The U.S. and the rest of the developed world experienced a brief and mild recession in mid 2022; recession will return once again in 2023, but in a more severe manner. Labor costs will catch up with the inflation of the last two or three years, and this will keep inflation in the U.S. above 5%.
Currencies: Major Trends
We believe the strong U.S. dollar has peaked and will fall in value modestly versus the world’s major currencies (euro, yen, and pound). The dollar can continue to rise versus the most important emerging market currencies — the Chinese yuan and the Indian rupee.
The dollar’s strong rally in most of 2022 has somewhat suppressed inflation in the United States, and has put pressure on commodities traded in dollars such as precious metals and oil (and other energy commodities).
We believe that will reverse in 2023, and that we will see support for precious metals, European currencies, and the Japanese yen; although we could also see the Canadian and Australian dollars appreciate modestly, we believe the greatest currency appreciation could be in the Japanese yen. It is significantly oversold, and we believe it will rally in 2023.
The Chinese yuan will become a more important vehicle for international trade, but at a very slow pace. The Chinese banking system is still closed to free-market international transfers because China relies on total control of its banking system, with no outside influences, to manage its domestic economy and political affairs. Therefore, predictions that the yuan will soon become a world reserve currency are incorrect.
Gold and silver should perform well under the conditions we anticipate. Uranium should do well, because world opinion has strongly swung in favor of nuclear power. Many countries are building out more nuclear capacity — small reactors especially — but this will take a few years to mature. Demand for uranium will rise at about 10% this year, and more uranium mining facilities will be brought back on stream that had been shut down for 10 or 20 years.
Base metals will perform decently because the U.S., Europe, and developed Asia will slow more than China. We think commodities are likely to begin outperforming after the first quarter of 2023.
In the west, we anticipate a recession of medium severity, with unemployment rising particularly in the technology sector and marketing industries due to weak advertising spending and weak consumer spending on goods and services.
Conditions will likely be hard for the retail and food service industries and their suppliers. Growth stocks in technology and consumer services which have high P/E ratios and low (or still-unrealistic) growth rates still face selling pressure.
Focus on low-P/E growth and strong balance sheets, where profitable companies can finance growth by internal cash flow. Outside financing will dry up, and inflation will increase costs. Avoid cash-flow negative software and ESG-related companies that will take years to attain profitability.
Less private capital will be available from venture capital firms for such companies; they will not be able to replenish their balance sheets easily in the equity market, and bond buyers will shy away from their high-yield instruments.
Private equity firms will pull back deeply on their buyouts of companies, and the entire alternative financial space — leveraged loans, venture capital, private equity, etc., will contract significantly. We note that even with recession in 2023, some stocks may have seen their lows in 2022.
Recession Will Not Do Away With Inflation
Inflation will likely fall to about 5% and then rebound again in a few years. This second wave of inflation will arise because the monetary and fiscal policies of the U.S. policymakers, and those in other developed economies, will not allow wise reduction of spending. So monetary policy will tighten, but fiscal policy will be unwisely loose.
Indeed, inflation from services and labor costs has become embedded, and will keep overall inflation high; the goal of 2% or even 3% inflation will likely prove unattainable. We run the major of risk of a return to the problems of the 1970s: very slow growth and embedded inflation due to the massive debt that the developed world has loaded on their balance sheets during the era of post-financial crisis and pandemic spending.
At the same time, politicians in the developed world have not cut spending, and indeed, have used fiscal spending in a manner that undercuts the intelligent use of monetary policy to slow inflation. The socialist strategy of making people more dependent on government has been adopted by both major political parties, and this is going to lead to an outcome much like the 1970s.
In the early 1970s government’s high-spending “guns-and-butter” policies allowed inflation to rebound strongly after the punishing recession of 1973 and 1974. Ill-advised wage and price controls did not work, but made things worse, and inflation psychology became embedded among consumers and wage earners as they realized that they had to fight for higher wages. The same is likely within two years from the end of the recession that we anticipate in 2023.