February 3, 2023
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When it comes to inflation, the bond market may be a more reliable forecaster than the stock market, writes Mechanics Bank Wealth Management, with current indicators suggesting the Federal Reserve rate hikes will peak at around 5%, versus 5.5% as earlier forecast. Among other things, “real time data on rents in the housing market indicate that rent inflation is slowing down much faster than the reported data indicate.” That means, “we are 80% of the way through this tightening cycle and the end is in sight,” Mechanics writes. 

Meanwhile Mitch Zacks at Zacks Investment Management writes that the Federal Reserve cannot let inflation get too “sticky” as inflation is “highly undesirable over the long term.” When inflation does fall, markets often turn bullish, he writes, stating that stocks staged “powerful rebounds” in 1970, 1974, 1979 and 1990 when inflation went above 6%. If 2022’s inflation peak turns out to be the sixth in the series, expect another stock rebound in 2023, Zacks writes. 

Taking a more bearish view is Goldman Sachs which expects “the bear market in stocks to intensify” before “more hopeful signals” emerge later in 2023, it tells investors. Many overseas markets have low valuations but don’t look for US stocks to suddenly elevate as they are “still at levels consistent with the peak of the technology bubble in the late 1990s.” Look for a flat year for S&P 500 earnings in 2023, Goldman writes.