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2022 was a year of fast-rising inflation, fast-rising interest rates and fast-rising questions about a future recession.
Prices went up while stock markets and savings account balances went down, leaving consumers and investors dizzy and their wallets hurting.
After all the turbulence, what’s next?
There will be more financial pain, that’s pretty sure — but it might not be as bad as feared, according to Vanguard’s look ahead to 2023.
The likely recession will not send jobless rates charging sharply higher, sticker shock will fade for the price of goods, then for rent and mortgages, Vanguard estimates said. And it all opens up chances for investors to rebound, the asset-managing giant noted.
The outlook, released Monday, comes as Americans are trying to peer into the future to guess what 2023 holds for their finances while they manage their holiday shopping and 2022 investments.
It also comes with key dates nearing that will give investors a glimpse on where the economy has been and where it could be going. On Tuesday, the Bureau of Labor Statistics will release its inflation data for November and on Wednesday, the Federal Reserve will announce its latest decision on interest rate increases.
Here’s one roadmap for what’s next, as far as Vanguard’s researchers and experts can see.
Hot inflation will cool
Inflation rates during 2022 climbed to four-decade highs. There have been signs of easing, such as smaller-than-expected price increases in October.
“As we step into 2023, early signs of a recovery in goods supply and softening demand could help balance supply and demand for consumption goods and bring prices lower,” the authors noted.
But the cost and demand of services are going to prevent a quick fall, they noted. Signs of slowing price increases are already emerging in rents and mortgages, but they will come down slower than the decelerating price of consumer goods, authors said.
That echoes the view from Treasury Secretary Janet Yellen, who said Sunday there will be “much lower inflation,” absent any unanticipated shocks to the economy.
But while hot inflation will cool, it will still be warm to the touch. The Fed says 2% inflation is its target goal; Vanguard said inflation rates will rest at 3% by year’s end.
A recession is very much in the cards — but wait
As “generationally high inflation” slowed economies across the world, the Fed and other central banks have countered with interest rate increases to tame price increases. That “will ultimately succeed, but at a cost of a global recession in 2023,” according to Vanguard’s report. Vanguard sees a 90% chance of a recession in the United States by the end of next year.
Vanguard is hardly alone in the recession call, so the question is how bad could the big picture look?
In Vanguard’s view, it’s not so bad. “Households, businesses, and financial institutions are in a much better position to handle the eventual downturn, such that drawing parallels with the 1970s, 1980s, 2008, or 2020 seems misplaced,” the authors wrote.
Job losses may be clustered
For now, the jobless rate in a tight labor market is 3.7%, a percentage that’s just a little above the lowest levels in five decades. That stands against the headline-grabbing list of companies where layoffs are mounting, notably in the tech sector.
When a recession, in all likelihood, lands next year, “unemployment may peak around 5%, a historically low rate for a recession,” the Vanguard outlook said. As interest rates climb, the job losses “should be most concentrated in the technology and real estate sectors, which were among the strongest beneficiaries of the zero-rate environment.”
The unemployment rate going from 3.7% to the 5% vicinity is “a sizable move,” Roger Aliaga-Díaz, Americas chief economist for Vanguard, said in a Monday press conference on the report. “But it is less dramatic of a rise than compared to past recessions perhaps.”
Spotting the opportunities
When interest rates go up, bond prices go down. So it’s been difficult for bonds with lower returns and “near-term pain” for investors this year, the Vanguard outlook said.
“However the bright side of higher rates is higher interest payments. These have led our return expectations for U.S. and international bonds to increase by more than twofold,” the report said.
Vanguard said U.S. bond return projections could be 4.1% – 5.1% annually over the next year versus its 1.4% – 2.4% return estimate last year. For U.S. stocks, the forecast could be 4.7% – 6.7% annually, while returns in emerging market equities could be between 7% and 9%.
The Dow Jones Industrial Average
DJIA,
is down more than 7% year to date. The S&P 500
SPX,
is off nearly 17% in that time and for the Nasdaq Composite
COMP,
is down 29%.
When the market hits bottom is impossible to know, the outlook said — but it noted “valuations and yields are clearly more attractive than they were a year ago.”
“There’s one silver lining of our outlook for a modest global recession. And it’s the clear silver lining of higher expected returns for investors,” said Joseph Davis, Vanguard’s chief global economist.
“We’re long concerned that the low rate environment was both unsustainable and ultimately a tax and a headwind for savers and long term investors,” Davis said.
But even with all the turbulence this year, “we certainly are starting to see the dividends to higher real interest rates around the world in the higher projected returns that we anticipate for investors over the coming decade.”
