My standard models expect a significant stock market rebound, but models that consider Federal Reserve policy see a further downturn.

The statistical forecasting models say:
January thru June, 2023:  -2% (Wide model spread: -10% to +10%)
Next 3 Months:  ?%  (0 to -16%.)
Probability of at least breaking even: 26% to 99% (No clarity here.)

My simple market forecasting models like what they see. Stocks have gone down over 2022, so that makes a rebound likely. Stocks are near their long-term trend line – good! Gross Domestic Product is not overly inflated by pandemic stimulus – good! Interest rates are not so bad by historical standards. Inflation has receded some. The Federal Government will keep up deficit spending for at least most of 2023. Statistically, based on market experience since 1984, these models expect a rebound of +10%. Super!

Another group of forecasting models in my mix is fully aware the Federal Reserve has embarked on an inflation reduction campaign. These models see the stock market as being near very risky statistical situations during a rate hike process. These phase-attuned models are much more negative for the coming half-year, with forecasts ranging from -5% to -10% for the first half of the year. The related probabilities of at least breaking even are approximately 25% — quite low. We are getting nearer the point when market crashes can occur.

Making a decision difficult, the overall statistical accuracy of both models is equal. A market situation like we face now with rapidly rising interest rates is unusual — and the past examples (1987, 1998, 2000, 2007) had financial crises that became the focus of attention. I will be surprised if a crisis does not develop this year due to international financial instability, Congressional budget stalemate, or commercial real estate bankruptcies.

In the meantime, my best guess is that the U.S. stock market will try to stage some sort of rebound during January.