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A Bear Market in Search of a Recession – What’s in Store for 2023?

A Bear Market in Search of a Recession – What’s in Store for 2023?

I still remember that day – it was sometime in 2007 – I was a young, aspiring private banker in the office of Citibank in Geneva, Switzerland. A dozen or so of us were gathering in Salon Leman on the 6th floor, where some of our best meeting rooms overlooking the lake were located. The topic: capital markets boot camp, a two-day intensive investment training for Citibank staff, led by a senior trader flown in from New York for the occasion.

Despite its name, Salon Leman did not face the lake, it faced the back of the building towards Rue du Rhone, Geneva’s main commercial street. But, from one of the side windows, you could still catch views of the Jet D’eau (Geneva’s iconic water feature) on a clear day. Good for daydreaming…

As it turned out, there would be very little time for daydreaming during our boot camp. Our speaker was witty and engaging, and would proceed to show us the proverbial ropes in a way only a hardened Wall Street veteran could. She had a no-nonsense approach and peppered her presentation with colorful anecdotes about everything from smoke-filled 80s trading floors to investing strategies favored by Japanese housewives.

But out of all topics covered, what stuck with me the most were her comments on bear markets and recessions. What she described was a monetary policy and interest rate pattern that preceded every bear market, without fail, each and every time: “an inverted yield curve,” she said. “And one final rate hike, one rate hike too many…chokes out the economy,” she added, making a strangling motion with her hand around her throat. “The yield curve gets inverted, then the recession hits…”

At that particular time in 2007, the yield curve had been dipping in and out of inversion (inversion simply means that bonds maturing in the short term had higher yields than bonds maturing further into the future, the opposite of what you would normally expect), and the federal reserve had been raising interest rates. Yet there was no talk of recession in the financial media and no signs of economic collapse. “This time is always different,” she told us, the popular explanation for the inverted yield curve at the time was that Chinese buyers had an insatiable appetite for long-dated treasury, keeping long-term interest rates down, and certainly not that we were heading into recession. “There’s always a story,” she said, sarcastically…


Within a few months of our boot camp, the episode now known as the Great Financial Crisis would begin to unfold. A recession so severe that my former employer, one of the largest banks in the world, nearly went bankrupt.

Today, Citibank no longer occupies the lakefront building in Geneva, and my former colleagues have been relocated to a more functional location on the other side of rue du Rhone, minus the lake views.

What, if anything, is a Recession?

I’ve since had plenty of time to reflect on the lessons from that day, and 2022 has offered yet another opportunity to ponder its wisdom. For most of the year, comparing the 2-year yield to the 10-year yield would have shown clear inversion (2-year yields higher than 10-year yields), and the Federal Reserve has been raising rates faster than any time in recent history. With these factors in place, it would seem like stars perfectly aligned for the start of a dreaded recession.

Depending on how one defines recession, it may in fact have already happened. With negative annual growth numbers in Q1 and Q2, 2022 delivered the often cited “two consecutive quarters of negative growth” that constitutes a recession in the mind of many. By that definition, we are either in a recession or just coming out of it.

Indeed, the word “recession” has grabbed headlines all over the world. If Google searches are any indication, it also occupied mind-shares like never before, even more than it did during the 2008 crisis, or the height of COVID lockdowns.

Judging by this apparent recession mania, one might imagine a world engulfed in the depth of a devastating recession. Yet, if this is indeed a recession, it certainly does not feel like one.

The hallmark of a recession, to my mind anyway, involves hardship among the general population, rising poverty, and weakness in the job market in particular.

Yet a photo from the 1930s Great Depression could hardly be more different from what we are seeing today, not only because of how incredibly well-dressed unemployed people were in the 1930s, but also because there simply isn’t any form of employment or income crisis in the US currently.

While some layoffs in grossly overstaffed tech firms have been making headlines, the reality on the ground for most businesses is still that of a labor shortage: a struggle to find enough workers.(1)

While much has been made about declining real (inflation-adjusted) wages, a closer look at income data (Figure 1.C) indicates that keeping up with inflation in this red-hot job market requires one simple step: switching jobs. Indicating that lagging wage growth has had more to do with payroll inertia than anything else.

To be sure, despite strength in the labor market, more bearishly-inclined observers may point to various softer pieces of data, including ISM manufacturing PMI (a survey of 400 industrial companies) which has now declined below 50, indicating anticipated decline in purchasing activity.

Yet once again, growing employment trends appear disconnected from negative survey results, begging the question: if manufacturers anticipate slower activity, why do they keep hiring?

Historically, disconnects between employment data and the more volatile survey results tend to resolve themselves with PMI data catching up to the reality of hiring activity. In other words, watch what companies do, not what they say.

Economic growth returned in Q3 with real GDP increasing by 2.9%, while companies continued to deliver strong results. Whichever way you look at it, the dreaded recession, so far, has failed to materialize. Setting aside news headlines, one might even conclude that as we enter 2023, the US economy isn’t actually slowing, but accelerating.(2)

Never go full Volcker

Much of the continued recession fears boil down to well-founded expectations that the Federal Reserve may hurt the economy with excessive monetary tightening. The pace of rate increases even prompted some observers to suggest that Fed chairman Jerome Powell had “gone full Volcker” a reference to Paul Volcker, the 1980s Fed chairman renowned for bringing rampant 1970s inflation under control.(3) Yet, current monetary policy is a far cry from anything resembling the early 1980s. During Volcker’s tenure, the US experienced the longest period of 5%+ real (inflation-adjusted) interest rates recorded in the post-war era. In contrast, despite all the noise and commotion, the current level of nominal interest rate is still well below inflation levels, and is actually one of the most deeply negative real interest rate environments ever recorded. Against this backdrop, it’s unclear what the current Federal Reserve leadership has done to deserve any comparison with their 80s counterparts. This did not stop public opinion from turning strongly against central bank actions, and a chorus of voices ranging from Elon Musk to the United Nations rang the alarm bell.
As for balance sheet reduction (the other half of the Federal Reserve’s two-headed tightening monster) some perspective is, I feel, also needed. For all the dramatic headlines, it is worth remembering that 2022 is not the first time we’ve seen the Federal Reserve reduce the size of its balance sheet: it had previously declined from about $4.5 trillion in October 2017 to roughly $3.8 trillion in September 2019, before Fed leadership eventually reversed course. Based on today’s balance sheet size, a comparable 15% reduction would require almost $1.3 trillion dollars to roll off the Federal reserve’s balance sheet. Since March this year, the current tightening phase has only resulted in a fraction of that decline (about $0.28 trillion). As things stand currently, the balance sheet remains more than twice as large as it was when the last tightening phase ended in 2019. In a recent report, a team of economists at Wells Fargo estimates the end result of the current tightening phase would involve a $6.5 trillion balance sheet in Q1 2025, a level that would have felt almost inconceivably high in the pre-COVID era.(4) As is the case with the interest rate debate, the mass hysteria over balance sheet reduction seems a bit naive once placed in a broader historical context, or perhaps it is symptomatic of a deeper underlying malaise (more on that later…) At the core, much of the monetary policy debate hinges on your perception of what drives current price pressures. Some believe that inflation is largely driven by temporary disruptions related to post-COVID hangover and the Ukraine war. If that is the case, then current interest levels may indeed already be too high, and the Fed may be committing a policy mistake by raising interest rates in response to transient supply-related factors.
On the other hand, if one believes that demand-related factors (possibly stemming from past monetary excesses) are at the root of current inflationary pressures, one could easily make the case that the current policy stance is still far too dovish and that higher interest rates are needed. Reality is, of course, more nuanced, and both demand and supply factors overlap and interact in unextractable ways. Nonetheless, demand vs supply factors is a piece of data that federal reserve officials have been tracking and are actively aiming to quantify.(5) Interestingly, the Federal Reserve bank of San Francisco’s data in Figure 1.G suggests that, while acknowledging that a lot of inflation remains “ambiguous,” 2022 marked a key cross-over point where demand-related factors have overtaken supply in its impact on inflation. Simply put, prices are rising because people are buying stuff, which is perhaps no surprise when considering the continued strength of the job market and rising wages.

This time won’t be different

Where is the recession then? And what should investors make of the deeply inverted yield curve? And did I, after all these years, forget the lessons of my strikingly prescient 2007 teacher?

The current level of yield curve inversion sends an ominous signal. Not only is it inverted, but the depth and breadth of inversion has reached levels that have always been associated with recession in the past. This time is unlikely to be different.

In 2007, however, it’s worth noting that my boot camp instructor held a deeply contrarian view. At the time, the economy was strong, and analysts were almost unanimously bullish even as markets were making new highs. This could not be more different from the current environment, which is characterized by generalized bearishness among investors large and small. As shown in the left side chart in Figure 1.I, current levels of “net bullishness” (a measure of sentiments among individual investors) is historically associated with very strong equity return in the subsequent year. The chart on the right (Figure 1.I) indicates extreme amounts of negative net positioning (bets that the market will fall) among speculators in the futures market, another strong signal of a possible reversal.(6)

In data going back to 1987, the American Association of Individual Investors has never before recorded 36 consecutive weeks of negative investors sentiments, 2022 is setting a new record.

Bearishness isn’t limited to individual investors either. In a recent Bank of America survey of mutual fund managers, the level of “underweight” equity” sentiment has reached levels consistent with extreme market lows (as happened during COVID and the 2008 crisis):  With extreme bearish positioning and sentiments, it’s worth remembering that predicting a recession and making money from that prediction are two very different things. A quick review of market performances immediately following prior instances of yield curve inversion shows that, on average, stock investors do surprisingly well in the months following inversion.

For what it’s worth, a naive speculative strategy involving a bet against the stock market in July 2022, when the curve first inverted, would have yielded negative returns thus far.

As history has shown repeatedly, investors are prone to herd behaviors both on the upside (buying into a frenzy) and downside (selling into a panic). While the transition away from years of unfettered money supply growth and low-interest rate will almost certainly involve recessionary periods (consistent with the yield curve signal), it’s worth remembering that there is no blueprint, no guidebook, to tell when it will start, how deep it will be, and what path markets might take leading up to it, or coming out of it.

Can we just move on?

While most of this year’s market commentaries have almost uniformly focused on the narrative of an excessively aggressive Fed destroying the economy, I believe a much different reality is taking shape as we enter 2023. In fact, many indicators suggest that the economy has remained stubbornly strong, and while the shift in central bank policy may seem scary, it is really not that dramatic when considered in the broader context. With inflation still running at 7.1%, and the Fed’s predicted “terminal rate” (the peak of its current rate rise plan) estimated at 4.75%, current policies still only make sense under the assumption of normalized inflation levels in the coming months. As for measures of broad money supply, they are still a long way away from what would be considered “normal” by any historical standard, even after recent balance sheet reduction efforts.

On the bright side, there are early signs that some of the high single-digit inflation readings of early 2022 may be starting to cool. However, as we have seen, continued strength in wage and consumer activity means that price pressures are likely to continue. From that perspective, the hope of a pivot in Fed policy may only materialize in the form of a short reprieve.

A strong consensus view has emerged around the idea that the Federal Reserve is aggressively normalizing its policy, that the recession has started, and that the next few months will now simply determine how bad things get (soft vs. hard landing). Reality, in my opinion, is much worse: there is no recession, and the Fed has not normalized its policy.

What makes this state of affairs much worse is that markets must still contend with what comes next. If this isn’t a recession, then what is? If this isn’t a normalized monetary policy, then what will normalization really look like?

Perhaps the obsessively negative mood we currently observe captures more than just recession fear. It captures the hope of a clean transition back to some form of an old normal, a way to move on: one more bout of policy tightening, one more leg down in the market sell-off, an orderly drop in corporate earnings, perhaps a few quarters of negative growth in early 2023, followed by a rebound, and a new upward trend, a sort of economic reset button. To be sure, It may very well happen that way. But as we enter 2023, the economy is still grappling with the consequences of years of monetary and fiscal largess: we’re enjoying its benefits in the form of renewed job market vigor and its increasingly intolerable costs (elevated inflation), as well as distorted markets.

We are still in the midst of the greatest monetary policy experiment of the modern central banking era, and 2022 has, at best, offered hints of what a possible resolution may eventually look like. Hopes of a clean transition out of the current regime, of an economic and monetary reset, are unlikely to materialize. Given the scale of past excesses, investors should brace for the long and winding road ahead toward anything resembling “normalization.” In all likelihood, it will involve repeated see-sawing between varying degrees of monetary tightening and loosening, and a heavy dose of fiscal policy attempting to even the playing field. From that point of view, 2023 may only mark the beginning of the process. And as much as we’d like to, we can’t just move on.


Headshot of financial advisor Syl Michelin in a blue suit with white button up shirt and gray background

Syl Michelin, CFA


Syl Michelin is a Chartered Financial Analyst and fee-only, fiduciary financial advisor who works with cross-border families and American expatriates.

2022 Investment and Market Outlook Guide

2022 Investment and Market Outlook Guide

Walkner Condon’s team of experienced financial advisors explores key topics that are top-of-mind as we transition out of 2021 and into a new calendar year, featuring the market outlook and review from Syl Michelin, a Chartered Financial Analyst™. Other topics include index funds, sector & factor performance, a pair of U.S. expat-focused pieces, and more.

Below you can find a breakdown of the individual pieces in this year’s outlook. 

1. The Year of Impossible Choices: 2021 Market Recap & 2022 Outlook
Syl Michelin, Chartered Financial Analyst™

Through a lens of current and historical data, Walkner Condon’s resident CFA® – and one of our U.S. expat advisors – explores the last year in the markets, with an eye on factors that may impact 2022. 

2. It Only Gets Harder from Here: Valuations, Bond Environment & Wage Growth
Clint Walkner

With a multitude of market highs throughout 2021 and a long stretch of gains post-2008 financial crisis, it would appear the “easy” money, if we can call it that, has been made. In this piece, Clint dives into the three main challenges as we move forward into 2022.

3. Reviewing 2021 Sector and Factor Performance and Positioning in 2022
Mitch DeWitt, CFP®, MBA

The markets were up routinely throughout 2021, but that doesn’t mean the gains were shared equally. Mitch discusses the sector winners (and losers) of the last year, along with what factors – things like high beta, value, and quality – had their day in the sun. He also goes into what might be on the horizon this year.  

4. Exploring Index Funds: History, Construction, Weightings & Factors
Nate Condon

The goal of this piece from Nate is to provide a general overview of indexes, the differences in how indexes are constructed, including equal-weighted indexes versus market capitalization-weighted indexes, and passive and factor indexing strategies.

5. Three Reasons to Look at Investing Internationally in 2022
Keith Poniewaz, Ph.D.

Though the U.S. dollar had its best year since 2015 in 2021, Keith – another of our expat advisors – explains several reasons to think about international investments in 2022, including the very strength of that U.S. dollar, valuations, and the rest of the world’s growth in GDP.  

6. Top Five International Destinations for U.S. Expats in 2022
Stan Farmer, CFP®, J.D.

One of our U.S. expat experts, Stan jumps headfirst into possible locations for Americans to consider in 2022 if they’re thinking about a move abroad – or even if they’re just wanting to dream a little bit. Stan covers ground in South America, Europe, and Asia in this thorough piece, perhaps his first crack at being a travel journalist in his spare time.

PODCAST: 2021 Q3 Market Recap

PODCAST: 2021 Q3 Market Recap

Walkner Condon’s Syl Michelin, a Chartered Financial Analyst, is joined by Stan Farmer, CFP®, J.D., and Walkner Condon co-founder Clint Walkner to break down the most recent quarter of 2021 and look ahead to the final quarter of the year. (Where did the time go in 2021?)

The three discuss a somewhat turbulent last three months – at least, more so than we’ve seen since 2020 – how September has a reputation for being the worst month for the S&P historically (although you can’t game it, as Clint reminds us), and more. 

2021 Investment and Market Outlook Guide for U.S. Expats

2021 Investment and Market Outlook Guide for U.S. Expats

Our In-Depth Look at Markets & Investment Trends

Whether you’re craving analysis of the impact of quantitative easing on the markets in 2020 and how that may continue to unfold in 2021, or you’re curious about the trend that is Electric Vehicles, our experienced team of advisors has authored a breadth of content for U.S. Expats, which is curated in our first-ever comprehensive investment guide. Covering topics like sustainable investing and the trends in the S&P 500, this interactive PDF is meant to be a tool in your arsenal as you approach 2021.