For a full year, Wall Street has agonized over a recession. What does it mean for your 401(k) and stocks if there is, or isn’t, a recession in the U.S.?
Even with layoffs piling up — Microsoft announced it will slash 10,000 jobs just this week — economists remain split on whether the economy will strengthen in 2023, Jeff Buchbinder, chief equity strategist at LPL Financial, tells Yahoo! Money.
A number of economist surveys point to a 60% probability of a recession in 2023. The Conference Board Leading Economic Index even says a recession may have already begun.
But Goldman Sachs economists say there’s only a 35% chance of an economic downturn — and that it may be avoided altogether.
So the first thing to realize is, “That kind of uncertainty is going to serve as a brick on the market’s head,” says Liz Young, head of investment strategy at SoFi.
Even though the stock market declined 19.4% in 2022, the S&P 500 falls by an average of 30% in a bear market — so investors could feel more pain, Buchbinder agrees.
Therefore, investors may need to brace for more stock market volatility in 2023.
However, there's a second scheme that could play out, since the stock market is a leading indicator. As Buchbinder notes: “We’ve priced in a fair amount of bad news.”
Thus, investors may have already been through the worst of a recession-related market wringer, he says.
That could mean, at the least, single-digit equity returns in 2023.
The third, most optimistic scenario for 401(k) and other investors in 2023 is that the economy sidesteps a recession altogether.
For that to happen, the labor market must remain robust and the Federal Reserve must get the inflation/recession interest rate balance precisely right.
If these stars align, Buchbinder says, the S&P 500 could rally 15% to 20% over the next 12 months.