US stock investors face recession fears as they bid good riddance to 2022

A rough year for U.S. stocks is winding down, but the market’s pain may be far from over, as investors brace for an expected recession in 2023.

With only a handful of trading days left in 2022, the benchmark S&P 500 index (.SPX) is down 19.8% year-to-date and headed for its biggest annual decline since 2008, as the Federal Reserve mounts its most aggressive monetary policy tightening cycle in decades to fight surging inflation.

While inflation is yet to be tamed, Wall Street’s focus is shifting to the potential consequence of the Fed’s rate hikes: a 2023 economic slowdown.

Firms projecting at least a mild recession include BlackRock, the world’s largest asset manager, Barclays and Oxford Economics. Fund managers in a BofA Global Research survey named a deep global recession and persistently high inflation as the market’s biggest risks, with a net 68% forecasting a downturn as likely in the next year.

Recession worries are also filtering into asset prices, while the Treasury yield curve has been inverted since early 2022, a signal that has preceded past downturns.

“The consensus is pretty clear that there is going to be a recession in 2023,” said Chuck Carlson, chief executive officer at Horizon Investment Services. “The issue is how much has the market already discounted a recession, and that’s where it gets a little bit thornier.”

Concerns that the Fed will maintain its hawkish stance helped drive the S&P 500 down 1.45% on Thursday.

The National Bureau of Economic Research, the official arbiter of recessions, typically declares them in hindsight, and consistent job growth this year makes it less likely that a recession has already started.

If a recession starts next year, stocks could be set for another swoon: A bear market has never bottomed before the beginning of a recession, historic data showed.

“If we’re not in a recession now but we’re going into one that would mean that a retest of the October lows and a break of them is quite possible in the first half of the year,” said Ed Clissold, chief US strategist at Ned Davis Research.

The S&P 500 marked a 2022 closing low of 3,577.03 in October, just over 6% below its current level.