With high inflation, rising interest rates, and volatility in both stock and bond markets, 2022 was a challenging year for financial prognosticators. So it may be surprising that a panel of experts from Merrill Lynch Bank of America found several pockets of optimism for the coming year.

“The corporate bond market may be one of the winning themes” of 2023, said Michael Hartnett, chief investment strategist at BofA Global Research, at a discussion earlier this month about the outlook for the coming year, sponsored by Merrill Lynch.

Recent confidence in bonds as a safe place to be is a good indicator, he explained, “that the losses that we saw in 2022 are not going to be repeated in ’23.”

Another encouraging note, he added, was the “resiliency of the consumer and strong labor market.” These, he said, are going to be “very key” going forward.

But Hartnett’s optimism about bonds is complex. He forecasted that the relative popularity of Treasuries will start to shift to corporate credits in the spring of 2023 as recession fears ease. That, in turn, will later mutate to higher demand for equities as corporate earnings improve.

“It’s not going to be as neat and tidy as that, but that’s basically the timeline we’re looking for,” he said.

Chris Hyzy, chief investment officer for Merrill and BofA Private Bank, moderated the discussion. He pointed out that 2022 was a year in which “both stocks and bonds had one of their most volatile and worse performing years on record,” he said.

Nevertheless, Hartnett contended that smart investors should be looking ahead, and not just at the first quarter of the coming year; they should be keeping an eye on the next three years, he said. Taking that longer view, there are going to be a lot more opportunities for growth than there were in 2022, he said, if only because valuations today are “a heck of a lot lower” than they were.

Ethan Harris, BofA’s head of global economics research, addressed macroeconomic issues. The high inflation of 2022 shouldn’t have been a total surprise, he said, given the tight labor market and easy monetary policy. What was unexpected, however, were the supply chain snags and concomitant commodity shocks.

“All of these things kind of combined to create this very high inflation,” said Harris, adding, “but the worst is probably over.”

In 2023, inflation should start coming down and supply chains improving, he said. But the “red-hot labor market,” chiefly due to high demand for labor-intensive services, and the expectation of continuing inflation—whether or not that’s actually justified—make recession in 2023 unavoidable, said Harris.

Moreover, he continued, job openings are at “almost record levels.” Some companies are slowing down their hiring or even doing layoffs, but many others are “still trying to fill all those missing slots,” he said.

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