The bear market is likely to continue into 2023 as the Fed raises rates

A brutal year for the US stock market is coming to an end, but investors hoping for a better 2023 may be out of luck.

While hopes of moderating inflation and the prospect of smaller rate hikes from the Federal Reserve have supported stocks in recent weeks, the relief rally has quickly faded as Wall Street ponders the greater likelihood of a recession next year.

The S&P 500 is down more than 20% year-to-date, while the Dow Jones Industrial Average is down more than 3,800 points. The tech-heavy Nasdaq Composite, meanwhile, is down about 33%.

But the bear market is likely to continue into 2023, according to James Demmert, the chief investment officer at Main Street Research, after Fed Chairman Jerome Powell signaled last week that rates could rise higher than previously expected.

ECONOMIC INDEX FLASHING MAJOR RECESSION WARNING SIGN

Federal Reserve

The Federal Reserve Administration Building

“The Federal Reserve remains committed to containing inflation through tight monetary policy, as Jerome Powell emphasized in his press conference, which is not good news for the stock market and supports the ongoing bear market in 2023,” said Demmert.

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Fed policymakers last week voted to raise benchmark rates by 50 basis points to a range of 4.25% to 4.5%, delaying their campaign to cool the economy amid early signs that the persistent high inflation is finally starting to subside.

However, officials have also charted an aggressive path of rate hikes for next year: New economic projections released after the two-day meeting show policymakers expect rates to rise to 5.1% in 2023, a much higher level than last projected rate of 4.6%. in September, according to the dot plot of expectations from individual members of the Federal Open Market Committee (FOMC).

Federal Reserve Chairman Jerome Powell

Fed Chairman Jerome Powell

“The committee expects that sustained increases in the target range will be appropriate to conduct monetary policy sufficiently restrictive to reduce inflation to 2% over time,” the FOMC said in its statement.

Quarterly forecasts indicate that the US central bank will not cut interest rates to around 4.1% until 2024.

Officials also indicated that economic growth will slow sharply next year and unemployment will rise significantly to 4.6% as interest rate hikes leave the US on the brink of a recession. The Fed expects the unemployment rate to remain high in 2024 and 2025 as steeper rates continue to take their toll by driving up borrowing costs.

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Like many others on Wall Street, Demmert expects the Fed to trigger a recession in 2023 with its sharp rate hikes as inflation remains well above the 2% target set by the US Federal Reserve, despite a small rebound in consumer prices last month .

“Our main message to investors is to be cautious,” said Demmert. “The Fed is trying to deliver a soft economic landing that we believe is very likely to fail and trigger a recession in 2023. The Fed would like inflation to stabilize at 2%, and it is hard to imagine that this would happen without a recession and much higher unemployment.”

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