The US stock market will bottom by the middle of 2023 as the Federal Reserve tamps down inflation without causing anything worse than a “mild” economic recession, according to Byron Wien’s annual list of surprises.
Fed policy makers will not pivot toward cutting rates and keep them in restrictive territory longer than necessary, Wien, vice chairman of Blackstone Group Inc.’s private wealth solutions business, and the firm’s chief investment strategist Joe Zidle, co-wrote in a note Wednesday. The tightening will push the central bank’s benchmark rate above the consumer price index and result in positive real yields, a rarity in the past decade. The dollar will outperform major currencies like the euro and the yen because the Fed will stay more hawkish than its global peers, they said.
“The Federal Reserve remains in a tug-of-war with inflation, so it puts the word ‘pivot’ on the shelf alongside the word ‘transitory,’” the pair wrote. “Despite Fed tightening, the market reaches a bottom by mid-year and begins a recovery comparable to 2009.”
Wien, 89, a former Morgan Stanley strategist, has put out his annual “surprises” list since 1986 and attracted a wide following for his assessment of the economy and financial markets.
Wien says his surprise list is made up of events that investors assign 1-in-3 odds of happening but he thinks are more than 50% likely.
In 2022, Wien, like virtually everyone else on Wall Street, underestimated the rate of inflation and its impact on asset prices. He predicted consumer price gains would reach 4.5% and the S&P 500 would drop almost 20% at some point before finishing the year little changed.
The equity index fell into a bear market, sinking as much as 25% from its January peak, but with inflation running north of 7% and the Fed hellbent on taming it, stocks never recovered. The central bank raised rates seven times, almost twice what Wien expected. The yield on the 10-year Treasury closed the year at 3.87%, above the 2.75% he had called for.
Some of his forecasts fared better, including an increase in oil prices and the outperformance of value stocks versus their growth counterparts.
Among Wien’s other calls for 2023:
- China will approach its growth target of 5.5% and work to improve trade relations with the West, which should help risk assets
- The US will become the world’s largest oil producer and increased fracking, along with a global recession will send crude to $50 a barrel
- Elon Musk will have Twitter “on the path to recovery” by the end of the year
- A ceasefire in the Ukraine war, as negotiations on a territorial split with Russia start in second half
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