Brace for turbulence in stocks as a recession, high interest rates, and China's reopening disrupt the market, BlackRock says

• Stocks will see turbulence in 2023 as the economy undergoes three major shifts, BlackRock warned.
• Strategists pointed to an incoming recession, high interest rates, and China's reopening.

Brace for turbulence in stocks, as a incoming recession, higher-for-longer interest rates, and Chinese's reopening are set to disrupt the market in 2023, according to BlackRock.

"These three shifts we see ahead in 2023 reinforce our tactical views and are why we maintain our most defensive stance," strategists said in a note on Monday.

First, sharp rate hikes from central banks aimed at pushing inflation down to targets will cause recessions in developed markets, BlackRock predicted. In fact, interest rates are now at their highest level since the 2008 recession, and the Treasury yield curve on the 2- and 10-year notes — a notorious predictor of a downturn — is at its deepest inversion in over 40 years.

Second, central bankers will pause rate hikes due to recession but are unlikely to lower them, given the risk of inflation spiraling out-of-control, BlackRock added. While inflation has cooled since June, it remains well above the Fed's 2% goal.

"Getting inflation to settle back at targets ... would need an even deeper recession than we see ahead. That's why we see central banks keeping rates higher for longer than markets expect instead of cutting rates."

The third shift to rattle markets this year is China's reopening, which could spur growth in other areas of the global economy while developed markets battle a recession and higher rates. That means emerging-market stocks could outperform those of developed markets, BlackRock strategists said.

That echoes the view of Bank of America, which said international stocks could outperform US stocks in 2023 for the first time in 15 years.