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We never know what’s going to kill a bull market.  So many events, most of them impossible to predict, can change investor sentiment very quickly and cause the markets to fall.  The end to the latest bull market in 2022 had many causes.  The war in Ukraine caused energy prices to jump and caused fears of the war spreading; global inflation spiked to 40-year highs; once high flying investments like crypto currency and many big tech stocks, plummeted.  The Federal Reserve, in an effort to get a handle on inflation, raised interest rates very quickly from levels near zero, causing the worst losses in the bond market ever.  Equity markets experienced extreme volatility as investors tried to make sense of a very unpredictable future.

One piece of good news over the past year is that the unemployment rate in the U.S. has remained very low.  This fact has baffled many of the nation’s top economic minds.  Much has been written about this, and the question, “How can we have a recession when everybody is working?” has been pondered and discussed endlessly.  By historic measurements, the U.S. entered an economic recession midway through 2022, when the first two quarters of the year experienced GDP contraction.  Many economists have been reluctant to declare this a recession due to very low and steady jobs data.  Regardless of whether we are in a recession or not, most economists predict slower economic growth in 2023 than we saw in 2022.

Real GDP growth for 2022 will probably come in around the 2% number.  Given the global uncertainty we are dealing with, that is really not bad.  GDP growth for 2023 is expected to be flat to slightly positive.  Again, as far as recessions go, that is not a bad forecast.  While the unemployment rate will probably rise, it is not expected rise to levels normally seen during a recession.  Keep in mind, the Fed is trying to slow the economy down to get inflation under control.  They seem to be willing to cause a recession to accomplish this.

Assuming the economy slows in the new year and inflation begins to drop, 2023 should be a good year for the bond market.  Much will depend on what interest rates do.  It is harder to make a prediction for the equity markets.  Even with the large pull back in 2022, we are not seeing the low valuations we normally see during bear markets, suggesting we could see new lows in the market.  At this point, it is impossible to know when the market will bottom out and a new bull market begins.  With a resolution to the war in Ukraine and/or a large drop in inflation, we could see a sharp rally in stock prices.  If these things persist and we see a deeper than expected recession, we could see an extended and deeper bear market.  We remain cautious at the current time but are optimistic better times will come.  Remember, markets hit bottom before the economy does, and are normally rising while the economy is still slowing.

Please contact us if you would like an updated copy of our Form ADV Part 2, or go to our website, where it will be posted when it is updated.

Wabash Capital