Each week our entire company gets together. These all-hands meetings are always interesting and informative — and can be fun as well. With the year coming to a close, my team and I took the opportunity to do a wrap-up of major market events for our colleagues — along with our outlook for next year. It was a hit, so we’d like to share it with you.
January 2022: Tapering, the intro
Despite high inflation numbers, the Fed initially took it easy on us and started tapering their stimulus (quantitative easing) rather than raising interest rates. However, the markets saw through it, and looking ahead to a hawkish Fed, began their descent.
February 2022: Russia invades Ukraine
After warnings to the world from the US, a terrible event happened — Russia invaded Ukraine. This sent inflation higher, from rising energy and food prices. Nearly everyone around the globe lifted Ukraine up in their hearts to fight this war.
March 2022: DJ Pow Pow’s first hike
Fed Chair “DJ” Powell and his committee hiked rates 25bps (0.25%) — the first one of the year. Inflation was coming in hot and the war exacerbated it, so many said it's about damn time.
June 2022: 75bp hike hits the charts
The Fed hiked the first of what would become four 75bp interest rate hikes, the most “levitation” in decades. The Fed has now raised rates by 3.75% — to the highest level since 2008. At this point in the year, inflation (CPI) hit a high of 9.1%, while inflation expectations bottomed.
August 2022: Live from Jackson Hole
At the annual Jackson Hole Economic Symposium, DJ Pow gave the shortest speech in his history — one he re-wrote at the last minute to ensure his message of fighting inflation, even at the cost of growth, got absorbed. This sent markets down, since they seemed to have forgotten about the Fed (and not to fight it).
End of November 2022: DJ Pow’s Chill Mix
During a speech at the Brookings Institute, DJ Powell referenced that “moderating the pace of rate increases may come as soon as the December meeting” — leaving the door open for smaller hikes and a potential “Powse” next year, lifting the markets. CPI data came in cooler than expected yesterday, adding support to a Fed that may be slowing down.
The good DJ Powell is expected to raise rates again today at 2pm — this time by only 50bps — with an underlying expectation the Fed could be close to the end of this rate hiking cycle.
Looking ahead to 2023, we think it will end better than it begins.
Essentially, we expect growth (or less of it) to be a headwind, but inflation should at least be a tailwind. After all, that’s the main way the Fed raises rates to fight inflation — with the expectation they can slow growth by slowing demand and, thus, inflation. So here’s what we expect next year:
Data to show more evidence of a recession.
Job softness starts to show up in the broad employment numbers, versus just the anecdotal evidence of layoffs and hiring freezes.
More areas that may have taken on too much leverage, that previously benefited from 0% rates, are revealed (e.g., areas in real estate, and lending, such as private credit).
Earnings expectations for 2023 continue to come down to reality.
Some time in the first half, the equity markets flirt with the 2022 bottom again (~3550 on the S&P 500), eventually helping valuations. It’s possible we don’t go down quite as far though, if interest rates trend toward the lower end of our expected range.
Moderating U.S. interest rates and inflation. We believe the 10-year Treasury rate will average around 3%-4%.
Because of this, we believe bonds could go back to doing what they have done in prior economic slow downs, versus the negative returns they had in 2022. We believe they will be generally more stable than equities and provide some income through interest. Note: this applies to government, municipal, and investment-grade corporate bonds, not high-yield bonds (below investment grade).
Since we believe interest rates will peak in 2023, we relatedly expect the US dollar to soften further. The dollar reached its highest point since 2002 in late September, and has since fallen some — just as some other major economies were starting to raise their own rates. The difference in interest rates from one country to the next often has an impact on the relative value of currencies.
Europe goes into recession due to the historical Russian energy reliance. This reliance is being worked on but not solved yet. Meanwhile, inflation and rising interest rates dampen growth.
China continues to rally on its re-opening now that Covid restrictions are generally lifted… but not without some swings, as the government waivers between supporting the economy and their potentially strained healthcare system.
BUT all is not lost for US stocks. Our own leading economic indicator, below in blue, is showing a potential bottoming — we are watching if it’s sustainable.
As the year progresses, we believe the US equity market, as it often does, will look beyond the headwinds to eventually improving growth. Looking back in history, the market often bottoms before the economic data does. In fact, in all but one of the last eight recessionary environments going back to 1970, measures such as payrolls and GDP bottomed on average four to five months after the stock market hit a bottom and began to rally. Said another way, the market starts looking ahead to better days on average four to five months before the economic data proves it’s not getting worse. As a result, we expect a more attractive equity market some time in the second half of 2023.
We’ll continue to watch things and let you (and our colleagues) know how our views evolve as we get more information.
Source: Robinhood Financial