As we navigate the financial landscape of 2023, it’s clear that the year has been marked by significant divergence in stock performance across size, sectors, and styles, against a backdrop of unusually low volatility. The global economy has shown resilience, with neither the US nor the global economy appearing fragile or likely to fall into recession at least through the third quarter of the year. However, the financial market outlook for the rest of the year and beyond is not without its challenges and uncertainties.
The Economic Outlook
The global economic growth is projected to fall to 2.9 percent in 2023 but rise to 3.1 percent in 2024. This slowdown in growth is attributed to rising interest rates and geopolitical tensions, such as the war in Ukraine, which continue to weigh on economic activity. Despite these challenges, China’s recent reopening has paved the way for a faster-than-expected recovery.
Inflation, a key economic indicator, is expected to fall from 8.7 percent in 2022 to 6.6 percent in 2023 and 4.3 percent in 2024, still above pre-pandemic levels. This decline in inflation is expected to be gradual, with a return to target unlikely before 2025 in most cases.
The Stock Market Outlook
The first half of 2023 saw significant divergence in stock performance across size, sectors, and styles, against a backdrop of unusually low volatility. However, the outlook for the second half of the year is less optimistic. In the U.S., absent any pre-emptive Fed easing, analysts expect to see a more challenging macro backdrop for stocks.
The S&P 500, a key benchmark for the U.S. stock market, has yet to make a new all-time high in 2023. Despite concerns of a potential U.S. recession, the S&P 500 is still up 13.3% year-to-date, as inflation has eased and rising interest rates haven’t severely impacted the economy as many experts predicted.
The Recession Outlook
While the global economy has shown resilience, the possibility of a recession cannot be ruled out. J.P. Morgan Research expects the U.S. to enter a mild recession near the end of 2023 as the restrictive policy stance from the Federal Reserve (Fed) creates tighter credit conditions, gradually dragging down growth. The long-feared recession is coming, but the magnitude and the timing is uncertain.
What is a recession?
A recession is a significant decline in economic activity that lasts more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.
What is inflation?
Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
What is the Federal Reserve (Fed)?
The Federal Reserve is the central bank of the United States. It performs five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest.
What is the S&P 500?
The S&P 500, or simply the S&P, is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.
What is a stock market outlook?
A stock market outlook is a forecast or prediction about the future direction of the stock market. It is typically based on an analysis of various economic indicators and financial data.
What is volatility in the stock market?
Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security or market.