The Fed Signal to Watch in 2023... or Later

BlackRock's outlook for 2023... The world's largest asset manager is finally on board... Is the worst over?... The recession question... You don't have to be right... The Fed signal to watch in 2023 – or later...

The world's largest asset manager thinks more 'damage' is ahead...

BlackRock, the far-reaching New York-based investment firm, had nearly $8 trillion of assets under management as of the end of the third quarter of 2022. That's on par with the Federal Reserve's entire balance sheet.

So, like the Fed, how the folks making decisions at the Wall Street firm think – and, more importantly, how they act – can have an outsized, ongoing influence on the markets.

Many groups and individuals have been making market warnings in recent months. I (Corey McLaughlin) wrote a few weeks ago that, suddenly, recession talk was leading the mainstream financial television shows.

But when the people responsible for investing money at BlackRock suggest more trouble ahead – as they just did in their 2023 global outlook published earlier this month – it's worth paying attention...

As I'll explain today, BlackRock's analysis isn't important because we're telling you to take its thoughts at face value and blindly invest based on them. Rather, you can put this information to great use while you make your own decisions.

So, here's what BlackRock said in its outlook for next year...

A lot of this should already sound familiar to regular readers. The first two lines of the firm's 16-page report are...

The Great Moderation, the four-decade period of largely stable activity and inflation, is behind us. The new regime of greater macro and market volatility is playing out.

No argument here...

You might remember our colleague Dr. David "Doc" Eifrig used that exact phrase... 18 months ago. Last June, Doc wrote in the Digest about the concept of the end of the Great Moderation – the previous 40-year period where booms and recessions were relatively mild.

Starting with the pandemic bust-and-boom, Doc warned that a market shake-up – with increased volatility the signature, not the exception, for years to come – might end up shocking most people with money in the markets. As he wrote in the June 23, 2021 Digest...

Today's financial industry – and in turn, its general portfolio allocation recommendations – is modeled on what has happened over the past 30 years... because in general, we've been in the same economic environment.

For the most part, the past three decades have seen steady growth, low inflation, and low interest rates...

The Great Moderation has powered stocks and bonds higher, making owning both assets an easy decision in the traditional "60/40 stock-bond" portfolio.

The idea being that stocks could give investors capital appreciation while bonds can offer income and hedge against unexpected events.

It was time to think differently, Doc said...

Last June, Doc noted inflation was high and going higher... stocks were already historically expensive... and bond yields and interest rates couldn't really go any lower, meaning their bond prices would go down too as rates went up. As Doc wrote...

Many people simply expect that the 60/40 portfolio will keep making a "safe" 7% or 8% annual return in the years ahead... But that's based entirely on the faulty premise that the returns of the past 30 years will continue in the future.

And the thing is, we're already seeing the conventional wisdom might be outdated...

So, yes, agreed on these points, Mr. BlackRock Decision Makers.

But hopefully you, dear reader, were able to heed the advice from Doc and others in our group shared before the conventional 60/40 portfolio had its worst performance in about 100 years. (More on this point – staying ahead of the mainstream – monetarily...)

The recession question...

The third line of BlackRock's 2023 outlook report is this...

A recession is foretold; central banks are on course to overtighten policy as they seek to tame inflation.

Again, no argument here. We're already seeing inflation numbers come down quickly to the point where I think deflation should be more widely discussed. (We'll have plenty of time, I suspect, for that in 2023.)

Plus, we already saw at least a form of recession in the first half of this year – with U.S. gross domestic product ("GDP") declining for two straight quarters. Unemployment didn't rise, so the official recession-callers at the National Bureau of Economic Research didn't pull the trigger or make any pronouncements. Still, the economy slowed enough because of record-high inflation...

Now, everyone who has the ability to publish an opinion seems to be trying to figure out not whether there will be a recession in 2023, but what it will look like, because of the Federal Reserve's moves to combat that high inflation.

They also want to see how, in turn, that recession will look for the stock market. As the folks at BlackRock wrote in another statement I agree with...

What matters most, we think, is how much of the economic damage is already reflected in market pricing...

In their view, based on earnings expectations, "equity valuations don't yet reflect the damage ahead"... even for a mild recession. The market has already punished some interest-rate-sensitive sectors – like housing – but BlackRock believes...

The ultimate economic damage depends on how far central banks go to get inflation down.

They're not going to "dial up our risk appetite" until they see markets getting closer to reflecting economic damage, "as opposed to risk assets just responding to hopes of a soft landing."

Now, from a contrarian view, the timing of all this – as in BlackRock saying the same things Doc and others said 18 months ago – makes me a little bullish. But it's hard to say we're definitely out of a bear market right now either.

Maybe the worst for stocks and other assets has already occurred... But we can't know whether it has or we're just early in the transition to even more damage.

Nobody can really know for sure what will happen next, but we can prepare...

The Fed's latest moves...

On Wednesday, we shared the central bank's latest move – a 50-basis-point hike to a range of between 4.25% and 4.5% for its benchmark federal-funds lending rate – and the Fed's message for future moves.

In short, it's higher rates... for longer and longer. The string-pullers at the Fed are getting more concerned about unemployment rising and economic growth slowing, but they're still seeing high enough inflation to keep raising rates, too.

In other words, a recession is likely, though the Fed isn't spelling it out so directly. And you have to dig even deeper into the data to understand what the Fed thinks about inflation... Its long-term inflation projections expect much more than 2% next year, too. (I can't believe more people haven't been talking about this.)

Reading between the lines and numbers, we get this possible picture of what's coming... The Fed could keep raising rates, then maybe pause them, then play a wait-and-see game on inflation and the jobs market. We don't know this will happen, but it would be wise to prepare for this scenario.

One way or another, the Fed will eventually stop raising rates...

The questions are when and at what point. Interest rates have been going higher for longer for the past 12 months... And while the pace of hikes is slowing, they're still going up...

History tells us that the worst for the markets won't happen until the Fed signals that it isn't only slowing or stopping rate hikes, but reversing them. That means cutting rates again.

This might sound counterintuitive. Shouldn't rate cuts be a sign of easier monetary policy, cheaper money, and more affordable loans?

Yes, all of those things are true.

But when the Fed cuts rates, it also means the economy is hurting... and the central bank thinks it needs a boost to keep unemployment from spiking.

Remember that in March 2020, the Fed did an "emergency" rate cut... and stocks didn't bottom for another two weeks. (Everything was moving quicker then.)

The history of bear market bottoms and their relationships with recessions goes back way further than two years, though. Try 70. As we've mentioned before via our friend and Chaikin Analytics founder Marc Chaikin...

Every bear market since 1955 has ended only when the central bank lowered interest rates.

That's one of those "wow" market statistics that everyone should know.

When the Fed cuts rates, that will be a real 'pivot'...

Not when it pauses or slows rate hikes. If that were the case, stocks wouldn't have sold off 3% last week after the Fed meeting.

We're not close to a pivot yet...

If anything, the Fed keeps saying it's going to continue raising rates. It has projected out a "terminal" interest rate for this cycle near 5%, but it has also revised that number higher during each of its last two quarterly economic-projections reports.

Powell noted last week that this has been the pattern for the past year. And the markets reacted violently to the downside after each of them... This could happen again in March, the next time one of these meetings occurs.

So what to do in the meantime?...

Well, in what might sound like another counterintuitive idea, selling everything right now before the bottom – if we haven't seen it yet – would probably be a mistake. After all, this yearlong bear market has significantly hurt a lot of stock prices, but not all of them...

There have been winners (like energy stocks), and there have been big losers (like tech stocks). Not all sectors, or the names within them, have been performing in identical fashion in this bear market.

Marc, the namesake founder of our corporate affiliate, covered this idea in a brand-new presentation, which he debuted last week. If you missed it, you can check it out for free here. I urge you to watch the whole thing, but here's one point and excerpt I definitely want to share...

First, as Marc said, even if we "Fed watch" with the best of them, we can't tell you precisely what the Fed is definitely going to do next... or when. Marc, who has five decades worth of investing experience, said it himself...

There's very little that I would say is truly "impossible" about timing the U.S. stock market – as long as you have the right system. But perfectly anticipating the decisions of the Federal Reserve isn't one of them.

It's a fool's game that has burned millions of investors recently, and all signs point to it burning millions more in the coming weeks.

The most optimistic voices are saying we might see a Fed pivot as early as mid-year.

Others say late 2023 or early 2024 is far more likely.

We can't tell you who will be right. But the good news is, it doesn't really matter. As we always say around here, you need to know what your goals are so you can make decisions to grow and protect your investment portfolio.

Not BlackRock's. Not your neighbor's. No one else's. The Fed will influence the markets, and so will massive money-management firms with nearly the same amount of assets under their management. But you, as an individual investor not beholden to any stakeholders but yourself, have much more flexibility to do what you want with your money.

Here are some other words of wisdom from Marc in his new presentation...

Let me be crystal clear: The actions of the Federal Reserve do NOT have to derail your wealth nor your investment strategy in 2023.

Like most things in life, there are two sides to this coin. In other words, I come bearing both good news and bad news.

The bad news, he says, is that if you're hoping for things to largely "get back to normal" in 2023 – you're not going to get your wish. All signs point to another year of extremes... highs and lows. The Great Moderation is indeed over.

And for some sectors, the dark days have only just begun.

But the good news is that, for some corners of the market, Marc says the worst is very likely over. There will be ways to make money in 2023.

The critical thing is to know what they are...

Using a powerful system and tools he has created and refined over decades – used by some of the biggest players on Wall Street to this day – Marc has found nine of the 10 best-performing stocks every year for the past seven years.

And now, for the first time ever, he's stepping forward to show you exactly where to move your money before 2023... and the names of what he believes will be the best-performing stocks next year.

The holiday season is a sleepy time of year in the markets, but it's a critical one for savvy investors who can stay ahead of trends and not be forced into reacting to them instead... Last year, certain sectors topped in November before the broad markets sold off after the new year.

Something similar could happen in 2023, Marc says...

In Marc's new presentation, he discusses the Fed, why the central bank's next move could decide whether you earn massive gains or suffer huge losses, and how his system has performed during similar rate-hike cycles.

Marc also shares the technical indicators he's following right now to track the market, the best- and worst-case scenarios we can expect for New Year's Day, and – just for tuning in – the name of his No. 1 stock to buy for next year and his top ticker to avoid at all costs.

For all the details, click here right now.

Don't Celebrate the Fed 'Pause'

"Market celebrations are premature with the Fed nearing the end of its hiking cycle," Michael Gentile, co-founder of Bastion Asset Management, tells our editor-at-large Daniela Cambone. He expects a choppy 2023 ahead...

Click here to watch this episode of The Daniela Cambone Show right now. And to catch all of the podcasts and videos from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 12/16/22): Maxar Technologies (MAXR) and short position in Capital One Financial (COF).

In today's mailbag, feedback on Dan Ferris' latest essay... and on Saturday and Sunday's Masters Series essays from our friends at Chaikin Analytics... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Dan, I read with interest your comment on Neumann's new projects and I tend to agree with you. That being said, Andreessen Horowitz are some of the smartest people around when it comes to venture. There has to be more to the story then simply throwing 350M to the guy and crossing your fingers. Especially now, when funding is a lot tougher to come by for founders." – Paid-up subscriber Pete S.

"Marc, I see what your main point about the [anxious index] graph is, but I have one major question: Have we reached a peak in the percent of forecasters predicting a decline in GDP?

"The chart seems to show that we got a peak above 40% of forecasters predicting a decline before the number turned down. But in 2008, it peaked closer to 80% predicting a GDP decline before it turned down. But it appears that peaks usually correspond with the ends of recessions, not with the beginnings, especially since 1990. In other words, it's always darkest just before dawn.

"I could be as pessimistic as a large group of these forecasters, but what if 40% of the group (the doom-and-gloomers) is correct this time? I don't know that this chart shows that the end is near." – Paid-up subscriber Kevin B.

"I see three shoulders and simply a failure to make a new high in an overall downward trend, which itself is a negative signal." – Paid-up subscriber Tom M.

All the best,

Corey McLaughlin
Baltimore, Maryland
December 19, 2022