The last time David Rosenberg shared his outlook for the U.S. stock market and the economy with MarketWatch, in late May, it was depressing enough.
Rosenberg is the widely followed president and chief economist and strategist of Toronto-based Rosenberg Research & Associates Inc. His sobering outlook last May echoed his thinking from March 2022, when he called the Federal Reserve’s intention to hike U.S. interest rates “not a good idea” and predicted that the inflation-fighting move would trigger a painful economic recession.
Five rate hikes later, with more expected, Rosenberg is even more pessimistic about the stock market and the economy in 2023 — and to say he’s disappointed with the Federal Reserve and Chairman Jerome Powell would put it mildly.
“The Fed’s job is to take the punch bowl away as the party gets started, but this version of the Fed took the punch bowl away at 4 a.m.,” Rosenberg said, “when everybody was pissed drunk.”
Many market experts and economists are now coming to Rosenberg’s side of the fence — criticizing the Fed for waiting too long to battle inflation and warning that the central bank now may be moving too fast and too far.
But Rosenberg is leaning even further over the railing. Here’s what he says investors, homeowners and workers can expect in the year ahead: The S&P 500 tumbles to as low as 2,700 (the lowest since April 2020), U.S. home prices decline by 30%, and the unemployment rate rises. The U.S. economy sinks into a recession, for which the Fed — especially Powell — would be largely to blame.
“He went from Bambi to Godzilla,” Rosenberg says of Powell’s radical and rapid transformation from inflation skeptic to inflation slayer. Adds Rosenberg: “Powell was getting compared to [disgraced 1970s Fed Chair] Arthur Burns. Nobody in central banking wants to be compared to Arthur Burns. This is the reality.”
Reality admittedly isn’t something the financial markets have had much of a grip on in the past several years, with essentially free money and a hands-off Fed fueling a go-go investing climate. “Now that movie is running in reverse,” Rosenberg says, and the reality here is that the next scenes will be tough ones.
But since markets are cyclical, the Fed’s flushing inflation and dumping the punch bowl should lead to a new bull market for stocks, bonds and other risk assets, Rosenberg says. He sees this fresh start beginning in 2024, so don’t despair — that’s less than 15 months away.
In this mid-October interview, which has been edited for length and clarity, Rosenberg discussed the challenging conditions investors face now and offered his top ideas for their money over the next 12 months — including Treasury bonds, stock sectors that can profit from longer-term business trends and technology themes, and good old-fashioned cash.
MarketWatch: You’ve been skeptical of the Fed’s interest-rate hikes since they began last March. But it seems that your skepticism has morphed into a kind of disbelief. What is the Fed doing now that is so unprecedented?
Rosenberg: The Fed is ignoring market signals and chasing lagging indicators like the year-over-year in the CPI and the unemployment rate. I’ve never seen the Fed at any point before this version totally dismiss what’s happening on the supply side of the economy and totally ignore what’s happening from market signals. I’ve never seen the Fed tighten this aggressively into a raging bull market for the U.S. dollar
DXY,
I’ve never seen the Fed tighten this aggressively into a major decline, not just in the stock market but in the most economically sensitive stocks. I’ve never seen the Fed tighten this aggressively into an inverted yield curve or into a bear market in commodities.
“ The odds of a recession are not 80% or 90%; they are 100%. ”
MarketWatch: A focus on lagging indicators doesn’t say much about where the economy is going. What do you see happening to the economy if U.S. central bankers really are looking at just one half of the picture?
Rosenberg: The things that the Fed actually has control over are either in the process of disinflating or actually deflating. The areas that are most closely tied to the economic cycle are starting to see a deceleration in price momentum. These are areas that are very closely tied to shifts in spending.
The index of leading indicators is down six months in a row. When you’re down six months in a row on the official leading economic indicators, historically, the odds of a recession are not 80% or 90%; they are 100%.
But the leading economic indicators are not what the Fed is focused on. If I was operating monetary policy, I would choose to drive by looking through the front window as opposed to the rear-view mirror. This Fed is focused on the rear-view mirror.
The impact from the Fed hasn’t been felt yet in the economy. That’ll be next year’s story. This Fed is consumed with elevated inflation and very concerned that it’s going to feed into a wage-price spiral even though that hasn’t happened yet. They are telling you in their forecasts that they are willing to push the economy into recession in order to slay the inflation dragon.
So a recession is a sure thing. What I know about recessions is they destroy inflation and they trigger bear markets in equities and residential real estate. You get the asset deflation ahead of the consumer disinflation, which is going to happen next.
It’s not complicated. Jay Powell compares himself to Paul Volcker and not any other central banker. Volcker also had to deal with supply-side inflation and did so by crushing demand and creating conditions for back-to-back recessions and a three-year bear market in equities. What else does anybody need to know? Powell was getting compared to [former Fed Chair] Arthur Burns. Nobody in central banking wants to be compared to Arthur Burns. This is the reality.
MarketWatch: It’s puzzling that the Fed would choose the narrow path you’re describing. What do you think caused this?
Rosenberg: Powell told us in March that the Fed was going to be operating irrespective of what’s happening on the supply side of the economy. They’re really only focused on the demand side. The risk is that they’re going to overdo it.
I know what the Fed is thinking. I just don’t agree with them. Ben Bernanke thought the subprime problems were going to stay contained. Alan Greenspan thought at the beginning of 2001 that we were just in an inventory recession.
Look at what happened. In August 2021 at Jackson Hole, Powell sounded like the nation’s social worker. He came to the rigorous defense of not just transitory but secular inflation. In March 2022, he went from Bambi to Godzilla. Enough was enough. The lingering impact of Covid, Omicron, the China shutdown, the war in Ukraine, frustration with the labor force making its way back. I get all that. But in a very quick manner they changed what appeared to me to be an effective structural view.
It’s basically a policy of damn the torpedoes, full steam ahead. They’re quite prepared to push the economy into a recession. Whether it’s mild or not, who knows. But they are focused on getting demand down. They’re focused on getting asset prices down. Because the holy grail is to as quickly as possible get inflation down to 2%. The longer inflation readings are elevated, the greater the chances they’re going to feed into wages and that we’re going to recreate the conditions that happened in the 1970s. That isn’t my primary concern. But that is their primary concern.
“ In a recessionary bear market, historically 83.5% of the previous bull market gets reversed. ”
MarketWatch: Financial markets already have convulsed. Walk us through the next 12 months. How much more pain should investors expect?
Rosenberg: First, make a differentiation between a soft-landing and a hard-landing bear market. In a soft-landing bear market, you reverse 40% of the previous bull market. If you believe we’re going to avert a recession, then the lows have already been put in for the S&P 500.
In a recessionary bear market, historically 83.5% of the previous bull market gets reversed. Because you don’t just get multiple contraction. You get multiple contraction that collides with an earnings recession. On top of that we have to layer on a recession trough multiple of 12. We’re not at 12. Then layer on top of that, what is the recession hit to earnings, which typically is down 20%. The analysts haven’t even started touching their numbers for next year. And that’s how you get to 2,700.
This is the retracement from the insane, more than doubling in the stock market in less than two years — 80% of which was related to what the Fed was doing and not because anybody was smart or we had a massive earnings cycle. It’s because the Fed cut rates to zero and doubled the size of its balance sheet.
Now that movie is running in reverse. But let’s not focus so much on the S&P 500’s level; let’s talk about when will the market bottom? What are the conditions when the market bottoms? The market bottoms historically 70% of the way into the recession…
Read More: ‘From Bambi to Godzilla.’ Strategist David Rosenberg skewers the Federal Reserve as he