Investment Clouds are Parting
As we enter 2023 the Rally Buster #1 (inflation) and rally Buster #2 (higher interest rates) unfortunately remain in place. The threat of persistent high inflation and the higher interest rates needed to fight it are still with us, but they do seem to be improving! Although the first part of the year has started out great we anticipate more volatility for global stocks.
We’re clearly closer to the end of this cycle than the beginning. We don’t expect the Fed to declare victory immediately. However, sometime in 2023 we believe the central bank will be reasonably satisfied with its progress on inflation and become more concerned with the effect of its policies on the economy. The result will be a pause in the fed funds rate hikes.
Given the underlying strength of many sectors of the economy as we enter the new year this will allow the markets to finally start to see some bright sky ahead. After the possibility of a challenging first 6 months or so, marked by unsettling market moves and a possible retracement of 4th Quarter 2022 gains, we think the clouds will start to part toward at least the end of 2023 if not sooner.
Will there be a recession? The Fourth Quarter 2022 Survey of Professional Forecasters and even the Fed itself are not predicting a recession. Market performance of December would disagree, as the threat of a recession drove growth stocks down about 5% for the month. We think there is still a chance for very slow growth or a shallow recession in 2023. The slow growth scenario is bolstered by positive revisions to 3rd Quarter GDP (originally reported at +2.6%, the first revisions was +2.9 and the second revision was +3.2%) and a fairly strong forecast for 4th Quarter growth. The Atlanta Fed 4th Quarter GDP Now estimate is +3.9% (also adjusted up recently).
Will there be a Fed pivot in 2023? Possible, but not probable. The first three meetings of the Fed Open Market Committee are February 1, March 22, and May 3. Three 25-basis point hikes at each of those meeting and then a pause with the fed funds rate sitting a bit above 5% would not surprise us. We do not expect rate cuts in 2023, but we do in 2024.
There’s still pessimism surrounding the economy and the markets as we enter 2023. We are less pessimistic than many about the global stocks for four reasons 1) monetary policy will be significantly less aggressive than last year; 2) the economy continues to be more resilient than expected 3) the dollar will continue to decline as the Fed pauses, creating a tailwind for overseas stocks; and 4) Russia’s struggles and recent talk of negotiations (someday) from Vladimir Putin of hope that the war in the Ukraine will end in 2023.
Of course, we don’t know when and to what degree these things will come together and when a reliable market turnaround would begin in response. But one thing is for sure: We must maintain our longer-term view and be prepared (i.e., “invested”). Trying to time the market is almost always a loser’s game.