2023 Market Outlook
2022…what a year. Inflation has reached the highest levels in 50 years. Interest rates rose, growth expectations fell, and both stock & bond markets suffered some of the worst losses in history.
OUT WITH THE OLD…IN WITH THE NEW
I think 2023 will be a year of inflections as we try to establish a turning point for inflation, interest rates, economic growth, and financial markets.
Recent trends show inflation is coming down just as quickly as it rose.
Housing ↓ Wheat ↓
Oil ↓ Cars ↓
I believe the year over year rates of inflation have peaked in the United States with Europe not far behind. As inflation declines, I expect the pace and magnitude of the path to decline, which will contribute to some more volatility. The Federal Reserve should be on target for final rate hikes in the first quarter of 2023. The FED could also be in position to cut rates by the end of the year.
Consumer price index (CPI) rose at a 6.9% rate, the highest level since 1981.The FED started the fastest tightening in 40 years, causing all asset classes to get hit. Stocks, bonds, crypto & risk assets all suffered. Stubbornly high inflation was an unexpected “shock” in 2022, that weighed on equity performance. As higher rates begin to affect the economy and slow things down, we expect growth to trough into the second and third quarters of 2023. Growth forecasts should improve as investors begin to look towards 2024.
Higher interest rates were another big contributor to weak market performance in 2022. We expect interest rates to peak by mid-year as the 2-year Treasury Yields usually fall, before the market bottoms. Inflation and interest rates should start to fall substantially marking an end to FED rate hikes. Anticipation of potential rate cuts should present a supportive backdrop for markets & risk assets as 2023 progresses.
It is very important for investors to stay invested for the mid to long term future and retain upside exposure to portfolios. This is crucial for investors to not get left behind as markets attempt to turn.
Timing the bottom for stocks is difficult, but a turning will emerge as investors begin to anticipate better growth, lower interest rates, and lower inflation.
From lockdowns to reopening, China’s economic cycle has been quite different from the rest of the world, due to the approach of managing COVID-19. Moving forward, President Xi and his policy decisions should start to improve and relieve investor unease. This will likely pioneer a full reopening and should support consumption & spending.
The Federal Reserve has made it clear it wants to reduce inflation so that it does not become intrenched into the economy. This will help keep capital allocated more efficiently and productively in the long term, which will keep the secular bull market going.RISKS…
Russia and Ukraine remains a wildcard
Elevated tension with China/US and Taiwan independence
Federal Reserve overshoot on interest rates could hurt the soft-landing scenario
As we enter 2023, a lot of bad news is being priced into the market. Valuations are compressed and have come down quite a bit. Rampant pessimism is at all-time highs. A detonate between Russia/Ukraine, inflation surprising to the downside, or economic activity reaccelerating to the upside, could lead to a better backdrop for risk assets (stocks).
Target S&P 500 4,625