Something weird is afoot. There is much talk of falling inflation, moderating wages, record-low unemployment and possible soft landings. Yet some on Wall Street says 2023 will likely turn ugly.
Sure, we had a beautiful January for investors – but what if this is only a mirage—a stock rally that’s already gone too far.
Well, this the warning from strategists at Bank of America, who said investors could face brutal declines if economic growth crumbles in the second half of the year. The risk is that inflation flares up again over the next few months, and that the US economy faces a deeper recession (than that initially predicted) after staying resilient in the first six months of 2023, they wrote. But with more experts seeing potential success for the Fed after a year of panicky recession calls, it may be a warning that’s hard for some to heed. The “most painful trade,” the bank’s strategists wrote, is always the “apocalypse postponed.”
The traditional favourable start to financial markets in 2023, due to investor fund inflows that typically accompany the new year, has been turbocharged by data pointing to a greater possibility of a soft landing for the US economy and, most recently, the signals coming out of the Federal Reserve.
So, underinvested investors need to assess their willingness to lose as valuations surge ahead of the consensus view on the economic outlook says Mohamed A. El-Erian is a former chief executive officer of Pimco, president of Queens’ College, Cambridge; chief economic adviser at Allianz; and chair of Gramercy Fund Management.
The generalised price rally has been so quick and so big for both stocks and bonds that it raises an interesting question for underinvested investors who have not yet put their money to work. What they should do correlates closely, but not entirely, to their economic and policy views.
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