Why Goldman Sachs isn’t too worried about a recession

By Nicole Goodkind, CNN

America’s largest financial institutions are pivoting into a new industry: Meteorology.

JPMorgan Chase CEO Jamie Dimon has already been very vocal in his ominous forecasts of storm clouds and hurricanes. Now, Goldman Sachs is joining him in the weather prediction business. The bank’s investment strategy group is sending a message to clients looking for market guidance in 2023 — Caution: Heavy fog.

What’s happening is that no one really knows what’s happening.

The economic data is hazy — the December jobs report showed that wage growth slowed last month but that unemployment also shrank.

Thursday’s Consumer Price Index report found that the rate of inflation fell 0.1% between November and December but that core CPI, which strips out the volatile energy and food categories, was up 0.3% from the month before.

Investors and economists attempting to predict when the Federal Reserve will pivot away from its painful inflation-fighting rate hikes or whether a soft, recession-less landing is possible are essentially reading tea leaves at this point.

In their 2023 outlook, Goldman analysts noted that disagreement about the economic forecast abounds within their own circles. Bill Dudley, a former Goldman Sachs partner and president of the New York Fed, puts the chance of recession this year at about 70%. Jan Hatzius, Goldman’s chief economist and head of global investment research, says it’s only 35%.

Fed Chair Jerome Powell has echoed the sentiment himself. “I don’t think anyone knows whether we’re going to have a recession or not,” he said at a press conference after the central bank’s December policy meeting. “It’s just not knowable.”

So what do investors do? Clients “facing the fog of uncertainty in financial markets, economic growth and geopolitics,” should “avoid unnecessary lane changes,” and “allow extra time to reach your destination,” wrote Goldman analysts. Instead of attempting to find a way out of the chaos, said analysts, investors should stay the course and wait for markets to eventually recover.

Equity markets are forward looking and tend to bottom about three months before recessions end, they said, and returns after bear markets have been relatively quick. That means that even if a recession ends in December of 2023, the market would recover a large percentage — about 91% — of its peak value before the year is over, they wrote.

Goldman analysts say that even with a sour economy, they predict the 2023 investment return on the S&P 500 will most likely be between 9-12%. That’s a huge jump from last year’s nearly 20% loss.

What the heck is going on with Bed Bath & Beyond stock

Just last week, Bed Bath & Beyond warned that it was on the brink of bankruptcy — but you wouldn’t know that by looking at the retailer’s stock. Shares were up by about 50% in Thursday trading, and 238% so far this week.

The company recently reported that it lost a third of its sales in last year’s holiday run-up and that it would close more stores and lay off corporate employees in a bid to cut costs and stay afloat. The company’s management also said in a Securities and Exchange Commission filing that it was considering bankruptcy.

Bankruptcy isn’t a good thing for shareholders, who are typically the last to be paid out if a company goes out of business. In many cases, they don’t get anything at all.

But investors appear to be betting that the retailer will somehow avoid that fate, and their bets are catapulting the stock upwards.

That speculation could also be triggering a short squeeze, which occurs when a stock moves higher and short sellers decide to cover their short positions or are forced to do so by margin calls.

Bed Bath & Beyond has been heavily shorted, with many investors betting the stock will go down — it’s currently the second-most shorted stock trading in the United States, behind Carvana.

And as short sellers buy the stock, the price increases, creating even more of a squeeze.

Fed Watch: The end of massive rate hikes?

When Fed officials talk, investors tend to listen — and today they liked what they heard.

The Fed’s days of three-quarter-point rate hikes are behind us, said Philadelphia Federal Reserve President Patrick Harker in a blog post Friday.

Better-than-expected price data shows that the Fed’s aggressive and economically painful rate hikes are successfully slowing the economy and fighting inflation, he said. That likely means the Fed will slow the pace of those hikes. Going forward, said Harker, rate hikes of a quarter point will be appropriate.

“Last year, we raised the target for the federal funds rate to between 4.25% and 4.5%,” Harker wrote. “That was a significant move, and a very fast one, given that we started the year at about 0%. I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed. In my view, hikes of 25 basis points will be appropriate going forward.”

Federal Reserve Bank of St. Louis President James Bullard, meanwhile, also said on Thursday that he doesn’t think rate hikes should continue beyond 2023, though he added that he’d like the option of raising rates by half a point on the table at the next policy meeting (Bullard is not a voting member this year).

“The front-loading policy has served us well and would continue to serve us well, going forward. I don’t really see any purpose in dragging things out through 2023,” he said at a virtual event hosted by the Wisconsin Bankers Association.

Markets ended Thursday higher, with the Nasdaq notching its fifth consecutive win and its longest rally since July.

Traders now overwhelmingly expect a quarter-point rate hike in February, according to the CME FedWatch tool.

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