We are back! We already wanted to open this new year for investing in stocks and forget this past year full of strong emotions. Speaking of opening, it seems that Goldman Sachs economists gave it a gift to the wise men on the night of the 5th so that they could distribute it to the investors. This gift is a document with a series of questions that we investors may face this year. So let's review the most important issues to take into account when managing our stock investment portfolio this year.
1. Will the US economy finally enter a recession? ️
Under the vision of Goldman Sachs economists, they believe that the United States economy will not enter a recession. Curiously, his opinion is far from the average, where the consensus places the probability of the entry of a recession at over 65% for the next 12 months. Goldman Sachs, on the other hand, predicts a probability of 35%. With these perspectives, we can understand that Goldman Sachs economists envision a soft landing scenario for the US economy, where interest rate increases manage to slow down the economy to reduce inflation without leading it to a recession.
Sources: Goldman Sachs Global Investment Research/The Wall Street Journal.
Goldman economists base this context on the fact that we do not need to enter a recession to be able to keep inflation under control. They believe that it is enough to have a period of lower growth that allows supply and demand to rebalance. This factor includes the labor market, where imbalances and wage pressures have pushed prices up.
2. How will the labor market develop?
From the perspective of Goldman economists, unemployment should not rise. We could see adjustments, but above all, job offers will decrease, which translates into fewer unemployed. In fact, the labor supply is already decreasing, but the number of layoffs remains low. At the same time, the labor reintegration of short-term unemployed people remains stable, which indicates that there continues to be a strong demand for labor. With these factors at play, unemployment should not continue to grow.
Furthermore, there is a historical relationship between job offers and the unemployment rate. From Goldman they predict that the employment rate will reach 6% at the end of 2023 but at the same time they do not want to give pessimistic airs: they see a maximum of 4,2% at the beginning of 2024, compared to the current 3,7%, less than what the Federal Reserve expects from its part.
3. How will the Fed manage interest rates in 2023?⚖️
It seems that he is not going to put the brakes on interest rates. From Goldman they expect the Federal Reserve (Fed) to raise rates three more times (February, March and May) by 0,25 percentage points. This would bring the Fed's interest rates to around 5-5,25%, compared to popular opinion, which placed them above 4,75-5% followed by some readjustment. This issue that Goldman raises is based on the fact that they do not trust that the Fed will lower its guard at the first sign of recovery that the economy may offer. It is true that inflation has fallen, but not to levels that ensure that it will not rise again. Determining whether a decrease in inflation is optimal to initiate a reduction in interest rates is the main headache facing the Fed.
Therefore, Goldman economists consider that interest rates will continue to rise and will be maintained except for unexpected breaks (recession = unemployment increased). After a year of increases in fiscal pressures, the economy will receive a small (but necessary) boost. This will lead to stronger growth, where the Fed can leave rates as they are for a little longer.
4. How will the development of interest rates be reflected?⏱️
Another factor to take into account is the time it takes for the effects of the Federal Reserve's interest rate increases to have an effect on the general economy. Goldman estimates that it takes approximately two quarters between rate increases and their impact on economic growth. This translates into good news, because Goldman believes that the worst effects of the interest rate increases have already occurred and are now about to fade in 2023.
The maximum effects of the increases are expected to progressively fade as the year progresses. This forecast takes into account a scenario where investors are far-sighted and the economic effects of rate increases occur when the market anticipates them and not when they actually occur. This is what is known as “buy the rumor, sell the news”, well known in the world of stock investing.