Investing experts predict a 'soft-ish landing' for the economy in 2023—here's what that means for your money

Last week, the Federal Reserve announced a 0.50 percentage point interest rate increase, bringing the target range to 4.25% to 4.5%.

The move was the latest in a series of boosts to rates meant to curb inflation. But while rate hikes will ideally get inflation under control, they could also slow the economy to the point that it tips into recession.

The good news: looking into next year, many experts believe the Fed can avoid a recession. "We believe there's a very good chance of at least a 'soft-ish' landing happening," says Kristina Hooper, chief global market strategist at Invesco.  

Here's what market experts say that could mean for the economy and your portfolio.

A "soft landing" would mean averting a recession, which is loosely defined as a sustained period of economic decline and typically characterized by steep job losses, high unemployment and widespread financial hardship.

For now, that looks avoidable in 2023, says Ryan Detrick, chief market strategist at Carson Group. "We don't see a recession. When we look at consumers, whose spending makes up about 70% of [gross domestic product], they're still extremely strong and healthy."

The labor market remains strong as well, with a miniscule 3.7% unemployment rate. While a slowing economy could theoretically force businesses to lay off workers, firms are currently posting a wealth of openings, Hooper says.

"The idea that unemployment has to go up by X amount for inflation to come down is overly simplistic," she says. "If you were to see companies focus on slashing job openings rather than jobs, you could achieve the same result without a significant rise in unemployment."

There are also indications that inflation is slowing and the dollar is weakening, both signs that the Fed's regime is, broadly, working.

But that doesn't mean the economy is out of the proverbial woods. While year-over-year inflation was lower in November than it was in October, it was still high at 7.1%.

Inflated prices combined with more expensive borrowing could eventually put consumers in a bind, says Jeffrey Roach, chief economist at LPL Financial.

"It's pretty clear the general expectation is the economy has to have a massive slowdown for inflation to come back into balance," he says. "Consumers are starting to tap into credit and savings, which isn't surprising." Should inflation to continue to force consumers into racking up debt, it's only a matter of time before recession strikes, he adds.

Roach believes a recession will materialize in 2023, but because of the economy's other areas of strength, he doesn't expect things to be too bad for too long.

"I don't think [the economic decline] would be as deep as if we had, say, a fundamentally flawed credit market," Roach says. "The average recession lasts 10 months. I think it will be shorter than average. Short and shallow is my expectation."

Overall, the Fed planning to ease interest rate hikes should come as good news to investors — even relatively pessimistic ones.

"Once the Fed stops tightening, and moves to a watch and wait policy, we know that markets respond favorably to those conditions," says Roach. "2023 could be a fairly decent year for capital markets."

History also bodes well for stocks coming out of a tough year. "The S&P 500 is rarely down two years in a row," says Detrick. "If you think the economy could avoid a recession, there could be a good sized snapback in stocks."

If there is an uptick in stock prices, a few types of investments in particular would tend to benefit, investing pros say.

Mutual funds and hedge funds, which account for $4.8 trillion, are taking bigger-than-average positions in companies that stand to benefit from avoiding a hard landing, say analysts at Goldman Sachs.

Those include firms in the industrial, materials and energy sectors, which all tend to be sensitive to economic swings. These types of stock sectors, known as "cyclicals," "are likely to perform better in the early stages of a new bull market," says Hooper.

Other potential beneficiaries of a soft landing: emerging markets stocks, which Hooper says should reap an outsize benefit from a weakening U.S. dollar, and small and midsize company stocks, which "are likely to be more attractive than large-cap firms."

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