Is The Fed Making A 'Policy Mistake' That Will Guarantee A 2023 Recession?

The SPDR S&P 500 ETF Trust SPY traded lower by 1.4% on Friday as the market headed for its second straight weekly decline.

Unfortunately, Bank of America analyst Michael Hartnett said Friday that the latest commentary and economic projections from the Federal Reserve suggested a soft landing for the U.S. economy was unlikely at this point.

BofA's Bearish Outlook: Hartnett said aggressive Federal Reserve tightening as the economy weakens could be a "policy mistake" and was setting the stage for a "hard landing" in 2023.

Bank of America economist Michael Gapen said Friday that lower-than-expected consumer price index (CPI) inflation in November was a step in the right direction this week, but the Fed still had a long way to go to get inflation back down to its long-term target of 2%.

"We retain our outlook for a mild recession in the U.S. economy beginning in 1H ’23 given the Fed’s goal of slowing growth in activity and softening labor market conditions. Putting inflation on a downward trajectory is only the first step," Gapen said.

In addition to anticipating a recession, Bank of America was also anticipating stock market weakness to continue. The firm expects the S&P 500 to drop to new multi-year lows of around 3,000 next year before rebounding to just 4,000 by year's end.

Other Experts Weigh In: Bank of America wasn't the only firm skeptical about the market outlook. Morgan Stanley said the S&P 500 would drop to the 3,000 to 3,300 range in the coming months. Deutsche Bank recently predicted a 25% stock market crash and said history suggested the possibility of a severe recession.

J.P. Morgan strategists predicted the S&P 500 would at least re-test its 2022 lows of 3,491 in the first half of 2023.

BMO Capital Markets chief investment strategist Brian Belski said the Fed would likely continue to raise interest rates through May 2023, which was bad news for investors.

"Unfortunately, we believe it will be difficult for stocks to finish 2023 much higher than current and anticipated levels given the ongoing tug-of-war between Fed messaging and market expectations," Belski recently said. "From our perspective, the Fed has been crystal clear in their intentions — which means at least a few more Federal Open Market Committee meetings of rate hikes followed by a prolonged pause period, something that we do not believe the market has fully discounted."

Benzinga's Take: While analysts are expecting the stock market to struggle in the first half of 2023, they are still generally constructive about stocks over the next 12 months. The average 12-month S&P 500 price target is 4,496, about 17.4% upside from current levels.

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