The only market forecast that should matter to stock investors: When does the Fed decide that higher inflation is OK?

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By this time last year, every stock market prediction for 2022 had turned out to be wrong. The US stock market peaked on the first trading day of 2022 and went down from there.

Every prediction made for this year 2023 can come true. increased instability. initial rally. Recession is certainly possible in the middle of the year. Recession is also possible this fall and winter. A soft landing for the US economy? could have been done.

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The most recent Outlook survey from the National Association for Business Economics showed economists can’t agree on how long the Federal Reserve will raise interest rates and how long the cuts should begin, triggering a rate cut and More.

Fed Chairman Jerome Powell contributes to the divergence of views by always adding the words “data dependent” to the tip of his hand, implying that we can’t know exactly what the central bank plans without knowing the next key economic indicator. , and the one after that (and the one after that).

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The possible scenarios that experts can describe for inflation, monetary policy, macroeconomic momentum, corporate earnings and geopolitical risks are a reminder of why investors should not make financial decisions based on predictions.

If you value predictions, avoid broad trend forecasting and look for pivot points that, once reached, can determine which strategies will win and lose in 2023.

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Zed Osmani, portfolio manager at Martin Curry Global Portfolio Trust, recently said in an interview on my podcast, “Money Life with Chuck Jaffe,” that he expects “a debate about whether central banks will pivot in 2023 or 2024.” There will be a healthy bull-bear debate.” ,

He’s looking at any pivot “in terms of magnitude, which leads to higher volatility in the markets, across inflation, across monetary policies, across the cycle and what else because of this array of potential scenarios and bull-bear debates.” Are we heading into a recession or do we avoid one.

Usually, disagreement makes a market; Compelling arguments drive prices to buyers and sellers based on sentiment. Nowadays, disagreement is roiling the market, waiting for an answer on how far the Fed should go to beat inflation.

Jurien Timmer, director of global macro at Fidelity Investments, said on my show this week that while the market was expecting the Fed to raise rates in the 4% range, it is now looking at rates at 6% and perhaps higher.

“These levels were unimaginable a year ago,” Timmer said. “Markets are handling it, but it’s a delicate balance as the stock market could go through a downturn – unless it’s a financial crisis [and] that it doesn’t last very long. It could see an earnings decline, given that it’s a … 10% — or 15% decline.

To overcome the constraints, Timmer said, “the promise of easy liquidity conditions is needed, which is why … the market has paused on expectations of a pivot from the Fed. … but the prospect of a pivot further is being pushed.

living with high inflation

The pivot point that some people are talking about now is when the Fed decides it can live with more inflation than it’s saying. The central bank says it wants to reduce the inflation rate to about 2%, and everyone takes that as the primary mission statement driving their operations.

But with unemployment at a record low and the economy still humming despite inflation and other conditions that are creating a recession, there is a real possibility that central bankers will have to raise the inflation rate to avoid a hard landing for the economy. have to accept above 2%. That’s what forecasters are thinking, but are not yet ready to suggest.

Timmer said: “If inflation drops to 2.5 or 3, the Fed will declare victory and say ‘that’s good enough, we killed the dragon,’ but I don’t think the Fed is anywhere close to saying that.” at current levels.”

In the absence of that kind of policy change, investors should hold on to whatever they believed and expected on New Year’s Day. The market rally hasn’t changed anything. Nor are technical indicators — which glowed green during January but are now glowing red — suggesting that the bearish market rally was only a respite.

This isn’t intuitive to most people, because those predictions weren’t made with a lot of confidence. Many investors chose their favorite forecast based solely on emotion, rather than a firm belief in how things would play out.

For now, if the markets and economy haven’t changed your mind about what’s next, holding off until you get a better signal may be your best move — even if it’s clumsy.

More: The Fed says interest rates are poised to go ‘higher than previously thought’. Here’s a Simple Way to Benefit From It

It’s nearly impossible to beat the stock market over time, but you should try nonetheless.

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