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Economic Outlook

By: Russ Colbert
Winter 2023 (Vol. 40, No. 4)

The housing market benefited from the loose monetary policy during 2020 and 2021. Once the Federal Reserve started to tighten, housing took a downward fall. This is not a repeat of 2006 thru 2011, but it will drag on for a while. Do not expect a recovery in housing until at least late 2023 or 2024. The drop in home prices should continue, nothing like the drop in 2006 thru 2011. Sales hit a 6.65 million annual rate in January 2021. But, by November of 2022 sales were down to a 4.09 million rate. Existing home buyers are currently facing higher mortgage rates. It amounts to a 52% increase in mortgage payments since December 2021. Meanwhile it is hard to convince current homeowners with low fixed-rate mortgages to sell. Sellers want more for their homes and buyers want to pay less. That will translate to weaker sales in 2023. Once we have a solid recovery in place housing will rebound swiftly.

Trying to predict stock values this year is more difficult than in past years. The wide range of unprecedented actions that we have taken during Covid leaves a range of different possible outcomes for this year. We feel the U.S. economy may enter a recession during the middle period of this year for several reasons. To start with we never felt the full impact of the lockdowns due to the government flooding the system with liquidity and borrowed money. Monetary policy is now in reverse, and we see a monetary policy tight enough to slow inflation but one that could also generate a recession. It is possible the Federal Reserve going from a rapid M2 growth in 2022 to almost zero M2 growth without the economy temporarily slowing will cause a mild recession. But we could be wrong, and it may just be a continuous moderate slowing without any negative surprises causing the desired soft landing we want.

Stocks are likely to bottom out during the first few months of a recession once investors realize this is not another financial panic like the one that we experienced in 2008 and 2009. That being the case, it would most likely give stocks some room to rally later in the year, even if we are in a recession. The stock market will start to see some light at the end of the tunnel and start to show some improvement. If this occurs, it is possible that we finish the second half of the year higher than the first half. Inflation has now started to come down, and the Fed could continue to make smaller interest rate increases going forward as they meet every six weeks. If they could reach the increased interest rate target needed to bring inflation in check by mid-year or shortly thereafter, this would show the Federal Reserve that future improvement in the economy is on the way very soon. The stock market would react favorably to this and start to rise at that point.

If it turns out that the Federal Reserve and Chairman Powell have engineered a soft landing and no recession in 2023 and the stock market ends 2023 confident of not having a recession in 2024, then stocks should rally in 2023 moving into higher territory. But keep in mind, even without a recession, the stock market’s biggest risk in 2023 is to lower in corporate earnings.

In summary, we believe improvement could begin during the second half of 2023 and continue into 2024 with the next Bull market running long and strong.

If you have any questions or need a free portfolio review to keep you on track with your investments or retirement plan, please call me.

Russ Colbert
Senior Portfolio Manager

Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.