The economy is looking weaker than it did before. Get ready for another stock market drop.

Many people use the new year to make a fresh start, and the market has certainly done so. After a painful 2022, the S&P 500 has jumped 5.5% in 2023, and is inching higher again Thursday following robust GDP data.

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Barron's provides live coverage of financial markets, from stocks and bonds to oil and crypto. This allows investors to stay up-to-date on the latest market developments. The confidence that comes with making a New Year's resolution may be gone by December.

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It's easy to dismiss concerns about a possible recession as worrywart pessimism, especially after this morning's report showed that the U.S. economy grew more than expected in the fourth quarter. However, it's important to remember that a recession is still a possibility, and there are several factors that could contribute to one. These include the surprising resiliency of the consumer and the "rule of the first five days." While a mild recession is a good median forecast, it's by no means the most likely scenario.

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Thomas Lee, head of research at Fundstrat, has a base case for the S&P 500 gaining more than 25% in 2023. He cites the "rule of the first five days" as one of the reasons for his optimistic outlook. A mild recession is a good median forecast, but it's by no means the most likely scenario, according to Gregory Daco.
Despite a strong start to the year, there is still a risk of a downturn later on.

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While everyone has their favorite recession indicator, there is usually an exception that proves the rule. However, when dozens of indicators are raising the alarm, it is a different scenario altogether. The Dow Handily Beat the Nasdaq in 2022. There were few places for investors to hide in this year's bloodbath, but those exposed to the tech-heavy Nasdaq Composite index undoubtedly had it the worst. This year's stock market crash was especially hard on investors who had put their money into tech stocks. The Nasdaq Composite index, which is heavily weighted towards tech stocks, was one of the worst performers during the sell-off.

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Deutsche Bank Chief Strategist Binky Chadha is warning that the recession has not been avoided, just delayed. Excess savings on personal and corporate balance sheets, along with acutely fresh memories of labor shortages, have postponed a downturn, but not prevented it. Chadha's research shows that 26 of 34 early recessionary indicators are now flashing red, more than double the number from just six months ago. Later cycle metrics have become more mixed, suggesting that a recession could occur in the third quarter, despite a first-quarter rally.

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The market is currently being driven higher by factors like slowing inflation, but these could quickly turn from tailwinds to headwinds, leading to more problems even if the U.S. manages to avoid a recession. There has been a lot of debate about whether or not the Federal Reserve has done too much to try to control inflation. However, Sumit Handa, managing director at Pennington Partners, warns that deflation could become a bigger problem for the market before the end of the year.

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He argues that while this could eventually lead to an inflationary phase similar to what occurred from the 1970s to the 1980s, it is more likely to cause pain in the second half of this year as consumers, businesses, and governments begin to feel the burden of debt with higher interest rates. The market looks like it could continue to steam higher over the next few months, even though the data propelling this bull market may be more like kindling than long-burning fuel.

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Stifel Market Strategist Barry Bannister believes that the defining issue for the decade may be weak stock returns, not weak nominal U.S. GDP. He predicts that the S&P 500 will keep rallying in the short term, but that a midyear peak could be followed by a sharp fall, due to factors such as geopolitical headwinds from the war in Ukraine and soaring commodity prices.