- Wall Street is torn over whether the US can still avoid a recession in 2023.
- Bullish commentators say the economy can keep roaring and sidestep a slowdown altogether.
- Here’s what five Wall Street experts are saying about the fate of the economy this year.
Wall Street is torn over the state of the economy, and investors are divided over whether the Federal Reserve can still guide the US to a soft landing while raising interest rates to fight inflation.
Over the last year, central bankers have raised interest rates an aggressive 450 basis-points to rein in prices, a move that’s taken rates to their highest levels since 2007 and weighed heavily on stocks and bonds.
Experts warn higher rates could overtighten the economy and lead to a recession. Investors and commentators are divided in three camps: those holding out hope for a mild slowdown and steadily falling inflation (aka a soft landing), those preparing for a more severe recession (hard landing), and those who say there will be “no landing,” an optimistic scenario where the economy keeps roaring without slowing down at all.
Here’s what five Wall Street experts are saying about the fate of the economy this year.
Jamie Dimon, JPMorgan CEO
A soft landing is possible, but markets are facing some “scary stuff” ahead, according to the JPMorgan boss. In a recent interview with CNBC, Dimon warned that positive economic indicators, such as a strong labor market and robust consumer spending, may only give a limited view of the health of the economy.
“That’s today. Out in front of us, there’s some scary stuff, and you and I know there’s always uncertainty,” Dimon said. “That’s a normal thing.”
Though JPMorgan has forecasted a mild recession to hit, Dimon previously said his team was preparing for a more severe downturn. He warned last year that a recession could hit the economy in the next nine months, which could cause the S&P 500 to plunge an “easy” 20%.
Kevin O’Leary, “Shark Tank” investor
“Shark Tank” investor Kevin O’Leary remained optimistic on the market in 2023, and made the case for a soft landing.
Though inflation remains high, the labor market is robust: the US added a stunning 517,000 jobs in January, nearly double economists’ expectations. Plus, consumer spending is still strong, O’Leary added.
“We may actually get what people keep saying is impossible … a soft landing. And what that means to me is an 8% return, probably 6% in capital appreciation and 2% dividend yields this year. Not the best year ever, but certainly not a 20% correction from where we are here,” he said in an interview with Fox Business on Wednesday.
Stocks have faltered in recent weeks due to investors pricing in two more rate hikes from the Fed at upcoming meetings. But markets have now “corrected accordingly”, O’Leary said, suggesting that headwinds were now fully priced in.
Jeremy Siegel, Wharton professor
The top economist and Wharton professor urged investors to stop throwing a “tantrum” about high inflation, and said it was possible the Fed could avoid a recession and a slowdown as the economy remains strong.
“I do see a stronger economy than I saw four weeks ago,” Siegel said in a recent interview with CNBC, adding that inflation may be overstated in the official statistics. Though prices clocked in at 6.4% in the January Consumer Price Index report, key elements of the CPI – like housing inflation – can lag behind the official numbers, he said. Meanwhile, more recent measures shows home prices have plunged from their 2022 highs.
He added that there was a better chance of a “no landing” scenario than a soft or hard landing, particularly considering the strong labor market that’s held up against the Fed’s tightening efforts so far.
David Rosenburg, Rosenberg Research chief economist
The idea that the US can keep growing and avoid a recession or a slowdown is a “fairy tale,” according to economist David Rosenberg, who rebuffed investors’ hopes for a “no landing” scenario in a recent interview with CNBC.
He pointed to signs of stress in the economy, which could indicate a coming downturn. For instance, the Treasury yield curve on the 2 and 10 year notes is now flashing its deepest inversion in over 40 years – a historically reliable indicator of a looming downturn.
And while fourth-quarter GDP came in above economists’ expectations, economic activity was actually slightly negative in month-per-month terms, Rosenberg said, suggesting the US is already in a slowdown.
“I don’t think that there’s a ‘get out of jail free’ card for the economy, in the context of the most acute Fed tightening cycle and into the most inverted yield curve since 1981. We just haven’t seen the full brunt of the rate shock just yet,” he added.
Jeff Gundlach, DoubleLine CEO
“Bond King” Jeffrey Gundlach warned that a recession is headed for the US economy, and investors need to prepare for it regardless of its severity.
“As long as we’re going into recession, you have to have a certain degree of protection. It won’t matter if it’s raining a half an inch an hour, or raining two inches an hour — in either case you need an umbrella,” he warned in a recent interview with Yahoo Finance.
Gundlach warned inflation would remain stubborn to the Fed’s tightening efforts, and pointed to the inverted yield curve, which he called the “best indicator of the forward economy.”
Fed officials have also said they intended to raise interest rates until the labor market is softened, with an unemployment target at 4.6%. That’s about one percentage point higher than the current unemployment rate – and an increase of more than 50 basis points has never been met without a recession, he warned.