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‘Bumpy times’ and ‘rude awakenings’: Wall Street insiders predict a rough market in 2023

In the Federal Reserve’s quiet period before its officials meet to decide their final actions this year, Wall Street watchers are filling the void, loudly warning that next year’s outlook for the U.S. economy and stocks is grim.

From Goldman Sachs’ David Solomon warning that the economy faces “bumpy times ahead,” to JPMorgan’s Jamie Dimon predicting a “mild to hard recession,” to Morgan Stanley’s Lisa Shalett prophesying that corporations will face a “rude awakening” on earnings, the messages have become increasingly dire.

“We do not think the economic conditions for a sustained upturn are yet in place,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a note. “Growth is slowing and central banks are still raising rates.”

Investors appear to be heeding the warnings. Following a two-month rally, the S&P 500 Index has fallen in all but one of the last eight sessions and dropped 1.4% on Tuesday. Equity strategists, historically the market’s biggest cheerleaders, are now predicting a down year in 2023. And the red flags are being waved in the wake of wage and services data that suggest inflationary forces still grip the economy.

The charts aren’t helping, either. Whenever the benchmark S&P 500 is lower by 15% or worse in a year through November, December is usually much weaker, according to BTIG’s Jonathan Krinsky. From January to November, the benchmark index had seen a 19% drawdown, with the gauge giving up its ground to close back below its 200-day moving average Monday.

One of Wall Street’s biggest bears, Morgan Stanley strategist Michael Wilson, backed away from a recent call that the markets recovery could last into December to say that “we are now sellers again” as he and his colleagues expect the S&P 500 to resume declines.

Layoffs are also adding to the gloom. On Tuesday, Morgan Stanley announced that it will reduce its global workforce by about 2,000 ahead of a potential U.S. recession, while Bank of America said it was slowing hiring.

Tech companies have already been slashing their workforces by the thousands. From Twitter to Meta to Amazon, corporations are trimming staff and slowing hiring as they grapple with higher interest rates and a pullback in consumer spending.

Yet there are those, including Charles Schwab’s Liz Ann Sonders, who think the economy will improve in the latter half of next year. After all, there has been growing evidence that inflation is easing and the labor market is cooling, fueling market optimism.

“We have to take our medicine still, meaning a weaker economy and a weaker labor market. The question is, is it better to take our medicine sooner or later? And I think sooner,” the firm’s chief investment strategist said. “The outlook is better for the latter part of 2023. The risk to that view would be if for whatever reason the economy continues to run really hot and the Fed has to really slam on the brakes.”

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