What to expect when you’re expecting (a recession)

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.


The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.



My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.



The latest signals of each model are as follows:
  • Ultimate market timing model: Sell equities
  • Trend Model signal: Neutral
  • Trading model: Neutral

Update schedule: I generally update model readings on my site on weekends. I am also on Twitter at @humblestudent and on Mastodon at @humblestudent@toot.community. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.


A difficult 2022

2022 has been a difficult year for equity and bond investors. Both stock and bond returns have been abysmal this year.



As investors bid good riddance to 2022, here is what the market is expecting for 2023.



A remarkable consensus

A compilation of views and forecasts from selected Street strategists show a remarkable consensus mostly of a difficult first half and a bottom for equities, but stock prices end the year roughly flat to slightly down.
  • Morgan Stanley: Morgan Stanley strategists are forecasting the 10-Year Treasury yield to end 2023 at 3.5%, with upside potential in securitized products such as MBS. S&P 500 ends 2023 at 3900, but with considerable volatility. The USD declined in 2023. EM and Japanese equities could deliver double-digit returns. Brent oil will beat gold and copper and end 2023 at $110.
  • Goldman Sachs: Goldman’s equity strategists believe that the “global stock market’s ‘hope’ phase could start later this year” and “it is too early to position for a potential bull market transition”. Goldman’s head of asset allocation research Christian Mueller-Glissmann is cautious on bonds: “In the near term, bonds could remain more of a source of risk than of safety” but there is “potential for bonds to be less positively correlated with equities later in 2023 and provide more diversification benefits”.
  • BlackRock: BlackRock is calling for a “new regime of greater economic and market volatility” and advises clients to be more tactical as “2023 will require more frequent portfolio changes”. The fund management company is short-term cautious on equities: “Tactically, we’re underweight DM stocks as central banks look set to overtighten policy – we see recessions looming. Corporate earnings expectations have yet to fully reflect even a modest recession.”
  • Standard Chartered (Bloomberg interview): Market expectations of Fed rate cuts are overly ambitious. The USD has peaked, though severe economic growth challenges remain.
  • Charles Schwab: Strategist Liz Ann Sonders is calling for a rolling U.S. recession of a sector-by-sector downturn, though she concluded on a more optimistic note: “there may be more bumps in the road near-term given inflation is still noticeable (albeit in the rearview mirror), but the longer-term outlook via the windshield has improved.”
  • Stanley Druckenmiller (CNBC): His base case is a recession and hard landing in 2023. The caveat is Druckenmiller’s positioning can change at a moment’s notice.
  • Bill Ackman (YouTube): He is concerned about the effects of a tight Fed policy. Equity buying opportunities will appear in the latter part of 2023.
The unusual feature this year is the degree of pessimism among Wall Street strategists.



What’s more, the degree of dispersion in forecasts is historically high.



However, a Bloomberg survey of institutional investment managers shows that respondents are more bullish than sell-side strategists.


Specifically of interest to US equity investors, Callum Thomas pointed out that market positioning from the State Street survey from custodial data shows that North American managers are cautious, but not panicked.




What’s the pain trade?

To summarize, investors are cautious going into 2023 but expect a recovery later in the year. The view of one more leg down can be confirmed technically from historical evidence. Mark Ungewitter pointed out that the S&P 500 broke its 200 wma in most recessions. A recession in 2023 is a virtual certainty and the 200 wma currently stands at just under 3700. Will this time be any different?



So what’s the contrarian or pain trade here? Could it be the nascent signs of a new bull (see The stealth change in market leadership you may have missed)? Tactically, the coming week is the start of the Santa Claus rally window, which begins on the day after Christmas and ends two days after the start of the new year. We will get more clarity after the Santa rally window ends.


Happy Holidays to everyone and wishing you better returns in 2023.


5 thoughts on “What to expect when you’re expecting (a recession)

  1. As a trader I love volatility! Please Santa MORE volatility for 2023.
    Happy New Year.

  2. “A remarkable consensus”
    Thanks for the links to various analysts. Amongst those referenced, Goldman Sachs seems an outlier. They appear to me more measured, less pessimistic than everyone else.
    Thanks for your timely advice, analysis. You got a lot of things right, this year, except the TLT call. Your TLT call was an outlier and perplexing. Merry Christmas all.

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