DANIEL VAUGHAN: Welcoming 2023 with more recession signals

Welcome to 2023, a new year beset by old problems. With markets in flux from rising interest rates, there’s one word on everyone’s mind for 2023: recession. Stock market indexes ended 2022 with the worst performance since 2008, the year of the global financial crisis. No one is expecting relief any time soon.

Usually, stock markets expect a “Santa Clause” rally to end the year. Everyone gets a nice boost to start the new year. Traders didn’t get that in 2022. “The S&P 500 fell 19% for the year, while the Dow Jones Industrial Average dropped 8.8%. The Nasdaq Composite declined 33%, hurt by a steep slide in technology shares. All three indexes logged their biggest declines since 2008, the year Lehman Brothers collapsed.”

The Nasdaq is filled with Big Tech names like Facebook (Meta), Apple, Amazon, Netflix, and Google (Alphabet). These core stocks became known as the FAANG stocks and are some of the highest-valued businesses in the world. They tumbled in 2022: “Meta plunged 64% in 2022; Netflix declined 51%; the other three stocks dropped at least 27%. Together the FAANG stocks shed more than $3 trillion in market value, helping drag the broader stock market down with them.”

Markets lose $12 trillion.

CNBC journalist and anchor Kelly Evans attached a cost estimate on all the losses of 2022: $12 trillion.

And that’s not all! The S&P 500 as a whole has lost $8 trillion, and the rest of the smaller publicly traded U.S. stocks another $2 trillion, according to analyst Howard Silverblatt and our own Robert Hum. Oh, and let’s not forget crypto! A year ago, the asset class (if you want to call it that) was worth more than $3 trillion. Today, it’s just over $806 billion. So between the stock market and crypto, we’ve lost more than $12 trillion of wealth in about twelve months’ timeWow.

All this before we even have a declared recession.

That brings us to 2023 when a recession is expected to take hold officially.

Kristalina Georgieva, head of the International Monetary Fund (IMF), said a recession is coming for many people. In an interview on CBS News’s Face the Nation, she said: “We expect one-third of the world economy to be in recession … Even countries that are not in recession, it would feel like recession for hundreds of millions of people.”

The Federal Reserve needs a recession.

Bank of America analysts said the U.S. Federal Reserve would have to tip the American economy into a deeper recession than Europe to fix inflation. Bank of America said, “the Fed has to do the dirty work of bringing labor demand down and in line with labor supply. Adding to the challenge is the fact that pent-up demand for labor in the U.S. is making it very hard to cool off the labor market. So the Fed has to deal with both the risk of second-round effects and the first-round effect of an overheating labor market.”

The short version of that is: the Federal Reserve wants layoffs. That’s why economists have spent several months predicting a recession for 2023. The Fed’s desire for layoffs is also why the Biden administration is already trying to sketch a recession policy plan.

It’s the most obvious policy-induced recession in history. The only remaining question is how deep it ends up being.

Talking about 2022, the Wall Street Journal summed it up, saying, “This year was a bust for markets.” It’s hard to disagree with that assessment. The problem is that 2022 looks like the frying pan, and now we jump into the fire.

Money speaks louder than words.

The Wall Street Journal added that investors ran to “defensive” sectors. Companies with a profit or unaffected by typical recessions are performing well. As one analyst described it, “They’re just a good place to hide.” No one wants to be the last one holding the bag of these abysmal markets.

Remember the housing market, too. HousingWire lead analyst Logan Mohtashami says the housing market entered a recession in June 2022. He identified four characteristics already in play: falling prices and production, layoffs, and incomes falling for those with real estate careers.

Recession is coming.

Housing, Big Tech, and crypto have all entered a recession. The question everyone is asking is when this spreads to other sectors. Companies with debt exposure are acting now, “Companies are stepping up efforts to collect on their bills and get cash in the door, aiming to limit future write-offs ahead of a potential downturn.”

All possible economic signs are flashing in bright red, warning everyone of the risks in 2023. If the United States avoids a recession, it would be more luck than anything else. No one is assuming a best-case scenario for their company. Rhetoric is one thing, but investors pouring their money into safe havens speaks louder.

Happy New Year from 2023. Buckle up now because nothing from 2022 got solved.