Markets are being rocked by the biggest macro storm in decades, and investors need to brace for volatility and persistent inflation, BlackRock warns

• A recession is coming and investors need to brace for a new period of volatility in 2023, BlackRock warned.
• That's because markets are still being rocked by the "biggest macro storm in decades," strategists said in a note.

Markets are being rocked by the biggest macro storm in decades, and investors need to brace themselves for volatility and persistent inflation in 2023, BlackRock strategists warned.

"Last year's shocks were extreme, causing sharp stock and bond sell-offs," strategists said in a note on Tuesday, pointing to factors like Russia's war on Ukraine, ongoing supply-chain issues, and hawkish central bankers in the face of rising inflation.

Those headwinds hammered stocks in 2022, with the S&P 500 posting its worst loss since 2008. Some market bulls are optimistic about a recovery as inflation cools and the Fed eases up on its rate hikes, but stocks are still dealing with the storm of macro pressures, strategists warned.

The conditions call for three investment lessons for the new year.

"First, widen the lens of possible scenarios and beware of inertia and other behavioral biases," BlackRock said. "Second, factor in compensation for geopolitical risk. Third: We need a new investment playbook – the key theme of our 2023 Global Outlook. That means more frequent portfolio changes in the new regime of greater macro and market volatility."

Investors hoping for the Fed to pull back on rate hikes are also likely to be disappointed, as central bankers won't step in to buoy stocks.

BlackRock predicted that while inflation will keep cooling as spending patterns normalize and energy prices back off, it will persist above the Fed's 2% target in coming years.

"We see stock rallies built on hopes for rapid rate cuts fizzling. Why? Central banks are unlikely to come to the rescue in recessions they themselves caused to bring inflation down to policy targets," the note warned.

Central bankers raised rates an aggressive 425-basis-points last year to rein in inflation, which cooled to 7.1% in November. Fed officials are waiting for the release of the November jobs report on Wednesday to guide their next policy move, but Powell has already signaled the central bank will keep monetary policy restrictive through 2023, with plans to hike rates to 5.1%.

A rate that high could easily overtighten the economy into a recession, experts say. BlackRock previously warned that a recession was already in the cards, although that hasn't been fully priced into corporate earnings.