Market Pulse - What's Your Story, 2023?

In this edition of the Market Pulse, Marcus is excited to share insights from our colleagues in Goldman Sachs Asset Management’s Strategic Advisory Solutions and Global Investment Research, as they provide their expectations for the year ahead. You can also read the original version of this article here.

2022 was quite a year for the economy and the markets. If you’re wondering where all of it may be headed next, you’re in good company.

One big question remains: Can overheated inflation be cooled without a recession?

Here are some expert insights to fuel your conversations:

Slowing, not stopping, our roll? Some investors and even experts may be underestimating the resilience of the US economy. Yes, Europe is already in a mild recession and China’s having a bumpy reopening.

But could the US cool its own overheated inflation without a recession? Our colleagues in Global Investment Research suggest that’s feasible: A long enough period of slower, but still positive, GDP growth may gradually help balance labor demand and supply and get control over prices. But we have much further to go down this challenging road in 2023.

The path could still be rocky… We’re likely to see inflation slowly cooling in 2023, especially in the important areas of housing and wages. Supply chains are flowing better, which will help, and they could improve even more if China works out a more flexible COVID-19 policy.

But if wages keep growing quickly and consumers start to think high inflation is here to stay (i.e., long-term inflation expectations rise), the Fed may have to work harder for longer to get prices under control.

…With a boulder or two. The supply challenges that contributed to this inflationary period aren’t easy to solve. Many are structural and long-term, based on years of underinvestment, especially for physical commodities. 

Commodity supply may also continue to be held back by higher interest rates, recessionary worries and the strength of the US dollar – which may persist in the face of slow global growth or relax as global growth and inflation issues improve.

We’re not alone. Sticky inflation isn’t just a US concern; it’s the major worry of consumers and investors worldwide. Our Federal Reserve is only one of the world’s major central banks focused on raising rates right now. With supply strained, the central banks’ goal is to moderate demand (by limiting credit) and create a better, less-inflationary balance between the two.

In the US, our Research colleagues expect the Fed to hike the Fed funds rate target up to 5-5.25%, with no cuts in 2023.

Uncertainty is almost certain. We go into 2023 with a divided government – the presidency and Senate in the hands of Democrats and the House led by a Republican majority – which can make it harder for lawmakers to agree on bipartisan legislation.

Add unresolved global issues to potential domestic conflicts, and geopolitics is likely to continue to be a source of uncertainty in 2023.