How Wall Street powered through recession fears

This article was originally written by Taylor Giorno for The Hill and can be found on their website here.

The stock market closed to books on a winning year on Friday despite earlier recession fears.

“2023 may go down in history as the year that defied all odds,” Kelly Milligan, co-founder of Quorum Private Wealth, told The Hill.

“At the end of 2022, nearly every expert at the major banks predicted a recession and/or bear market in 2023. And yet, despite some volatility and selling over the summer, markets logged a largely positive year.”

The S&P 500 did not hit the record high on Friday that some anticipated, but the benchmark index capped off the year with a nine-week win streak and was up 24 percent for the year. The Dow Jones Industrial Average was up 13.7 percent for 2023, and the Nasdaq was up 43.6 percent.

Wall Street saw particularly strong gains in December as the Federal Reserve signaled its intent to bring down interest rates next year, a potential boon for President Biden heading into a pivotal election year.

“While it’s common for stocks to rally in December (the so-called Santa Clause rally), we saw even more optimism this year thanks to signals that the Fed may cut rates as many as four times in 2024,” Milligan added.

All but three members of the Fed’s monetary policy committee forecasted at least two rate cuts next year. By Friday’s closing bell, markets had priced a 72.8 percent chance that the first cut of 25 basis points will come in March, according to the CME FedWatch Tool, which some economists have suggested may be overly optimistic.

But many economists were also expecting a recession this year that never materialized, just one of several mistaken forecasts during a year of economic uncertainty.

There was no one driver of this year’s economic turnaround, Javier Palomarez, founder and CEO of the United States Hispanic Business Council (USHBC), told The Hill.

“The decline in inflation from 6.4% in January to 3.1% today was key in pausing interest rate hikes, with a forecast of three additional drops in 2024. Pandemic-induced supply pressures are gradually easing, job opportunities are booming, and fuel costs fell by 19% since September. Lastly, GDP growth has remained positive and stable for the past 5 quarters,” Palomarez said.

He also noted the surge in the “Magnificent Seven” stocks of Amazon, Apple, Google parent company Alphabet, Meta, Microsoft, NVidia and Tesla that have driven the latest market rally, which Heather Wald, partner at Bel Air Investment Advisors, also pointed to.

“It is worth reiterating that this rally has not been broad in nature,” Wald said in a statement. “Much of this discrepancy is due to the excitement surrounding AI, which will remain a key investing theme for many years to come.”

The technology industry was among the hardest hit by interest rate hikes, resulting in massive layoffs this year at major companies including Meta, Google and Spotify.

While many feared the collapse of Silicon Valley Bank and Signature Bank in March would usher in the much-anticipated recession and sparked new fears of another 2008-style meltdown, the damage was ultimately contained.

“Coming off of the worst year for the stock market since 2008, the focus remained on everything that could go wrong. And some things did indeed go wrong – a regional banking crisis, ongoing war in Ukraine, an economic slowdown in China, a hawkish Federal Reserve, and a new war in the Middle East. But from a market perspective, investors looked past many of these headwinds and instead focused on the positive,” said Todd Morgan, partner and chairman at Bel Air Investment Advisors, in a statement.

While markets are rallying as economic conditions improve and rate cuts near, voters across the political spectrum aren’t sold.

Everyday Americans are less positive than markets, a potential pitfall as the Biden camp has centered “Bidenomics” in his 2024 reelection campaign.

Just 33 percent of Americans approve of how Biden has handled the economy, a recent CNN poll found. Only 29 percent thought economic conditions were “very good” or “somewhat good.”

Although inflation has fallen dramatically, wages are up and unemployment is at its lowest level in decades, high interest rates have squeezed Americans burdened by record household debt and cut into savings that were once flush with pandemic-era stimulus payments and programs. 

Affordable housing also fell to record lows this year as mortgage rates spiked, although both are expected to ease next year, especially as interest rate cuts materialize.

“For a Biden victory lap to be truly justified, these economic wins must reach boardrooms and kitchen tables alike. The disconnect between macroeconomic success and individual financial struggles remains the key challenge for the Biden Administration to solve in the months ahead,” Palomarez said.

Biden admonished reporters last Sunday over their coverage of the economy, saying, “All good. Take a look. Start reporting it the right way.”

But Palomarez warned it would be a mistake to brush off the discontent of American consumers.

“Whether or not credit is given to ‘Bidenomics’ or the inherent resilience of our economy could fuel a turnaround in President Biden’s performance metrics as we enter an election year. However, the disconnect with American consumers can’t be ignored,” Palomarez said.