BlackRock is undoubtedly one of the most important companies on Wall Street. Now the giant is making a disturbing announcement. What drastic changes do they think are coming to the market?

The stock market is changing. The rules of the game are changing, say BlackRock officials $BLK-0.2%

Investment strategists at the world's largest asset manager warned of several factors in their global outlook for 2023, released this week. Chief among them are a looming recession, high, runaway inflation and market fundamentals.

"The 40-year period of mostly stable activity and inflation is over," wrote Vice Chairman Philipp Hildebrand and a team of senior managers. "A new regime of greater macro and market volatility is emerging. Moreover, almost everyone agrees on the arrival of a recession."

Hildebrand and his team argue that that great stability, a period of low inflation and steady economic growth, has allowed stocks and bonds to flourish in a way that will not be possible in the future.

For investors, this new economic era will require a new, flexible strategy that includes selective stock picking and more active portfolio management.

This adds a little weight to the view of many experts that I mentioned here earlier in the year - that the SAP and other indices may no longer guarantee good returns because they simply have nowhere to grow.

"We see no reason for sustained bull markets as in the past. That's why a new investment playbook is needed," they wrote. "What worked in the past will not work now."

BlackRock said three factors will keep inflation above central bank targets, dampen economic growth and make it harder for investors to turn a profit in the years ahead.

1) Aging

An aging population will reduce the workforce and force governments to spend more on elderly care, causing worker shortages and reduced production.

2) Deglobalization

Tensions between global powers signal that we have entered a "new world order" in which the globalized supply chains that once helped drive down the price of goods may be broken.

"In our view, this is the most complex global environment since World War II," Hildebrand and his team wrote. "We see geopolitical cooperation and globalization turning into a fragmented world with competing blocs. This comes at the expense of economic efficiency."

3) Ecology

Finally, a faster transition to clean energy will ultimately be inflationary unless huge investments flow into carbon-neutral solutions.

"If carbon-emitting generation declines faster than low-carbon alternatives are phased in, shortages could occur, leading to higher prices and distorted economic activity," they wrote. "The faster the transition, the more unsynchronized the handover could be - which would mean greater volatility in inflation and economic activity."

And how to prepare?

BlackRock also broke down three themes in its 2023 forecast to help investors prepare for the "new era."

1) When evaluating stocks next year, it will be critical to consider the "damage" caused by central bank interest rate hikes and recession risk.

"In our view, equity valuations do not yet reflect the damage that lies ahead," they wrote. "We find that earnings expectations do not yet reflect even a mild recession."

2) Reassessing bondsAfter
years of underperformance relative to equities, it may be time to look to the bond market to provide stable income as
a
recession looms.

"Fixed income finally offers income after yields have risen sharply globally," Hildebrand and his team wrote. "This has increased the appeal of bonds - investors have been hungry for yield here for years."

They advised investors to look for investment-grade loans and short-term government bonds, but warned to avoid long-term government bonds because of rising debt levels and higher inflation.

3) Living with inflationAnnual
inflation as measured by the Consumer Price Index (CPI) likely peaked in June at 9.1%. And some CEOs and finance executives say it will decline rapidly.

BlackRock, however, has a different view.

"Even though a recession is looming, we think we will live with inflation," Hildebrand and his team wrote. "We do see inflation cooling as spending patterns normalize and energy prices recede - but we think it will linger above policy targets in the years ahead. We don't think markets are pricing in more volatile and sustained inflation yet."

In this environment of higher inflation, they recommend inflation-protected bonds and avoiding equities - at least in the near term.

CPI was a big topic this week. In fact, the latest numbers were somewhat surprising. The CPI rose 0.1% in November and is up 7.1% over the past 12 months.

You can view BlackRock's full forecast here.

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Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources (YTB, BlackRock). Investing in financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.