January 27, 2023

Raven Tribune

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Stocks collapsed on the interest rate shock of 2022. Here’s what will drive the markets in 2023.

2022 is over. take a breath.

Investors were understandably excited to ring the bell in the stock market’s worst year since 2008, with the S&P 500 SPX,
-0.25%
down 19.4%, the DJIA Dow Jones Industrial Average,
-0.22%
fell by 8.8% and the Nasdaq Composite Index,
-0.11%
shedding 33.1%.

Adding to the pain, the bond market has also been a disaster, with some sectors seeing their biggest annual losses in history while US Treasury prices have slumped, sending yields soaring.

That presented a rare double whammy for investors, who usually see portfolios backed by bonds when stocks take a hit.

So what now? Flipping the calendar doesn’t make the factors that led to the market’s losses disappear in 2022, but it does provide investors with an opportunity to think about how the economy and markets will develop in the year ahead.

An interest rate shock with the Federal Reserve raising interest rates at an historic pace in its effort to rein in inflation set the tone in 2022. A return to higher rates – and what may be the end of a four-decade era of low interest rates – is expected to reverberate in 2023 and beyond. after him.

the story: The end of a 40-year era of low interest rates is a “shake-up” for investors: Howard Marks

While inflation, still high, is showing signs of peaking, the market has been robbed of a seasonal boost heading into the new year on fears that the Fed’s continued efforts will lead to a recession that will destroy corporate earnings in 2023.

Read: How Santa Claus’s rise, or lack thereof, sets the stage for the stock market in the first quarter

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Analysts say the interaction between Fed policy, inflation, economic growth and earnings will drive the market in 2023.

Fed

“This was a Fed-led market that was projected on the basis of inflation that was not temporary,” Quincy Crosby, chief global strategist at LPL Financial, said in a phone interview.

The Fed dropped the “passing rhetoric” and launched an aggressive campaign to tackle inflation. “This has led to a market that is concerned about economic growth and whether we are entering 2023 facing a significant economic slowdown,” Crosby said.

economic inflation

Analysts said investors may find some optimism in signs that inflation has peaked.

“The days of the 2% CPI decline we enjoyed from 2008-20 are probably over, probably for a long time. But inflation could be low enough (3%-4%) for the Fed to fundamentally think that it has accomplished its mission (although he wouldn’t say it directly because the target is still 2%), but for all intents and purposes, we could exit 2023 without inflation problem.

Skeptics suspect that a slowdown in inflation will be enough to prevent the Fed from following through on its indications that it intends to raise the federal funds rate above 5% and keep it there for some time.

He was, said hedge fund titan David Tepper, in an interview with CNBC in December “short leaning” On the stock market “because I think up/down doesn’t make sense to me when I have a lot of… central banks telling me what they’re going to do.”

We see: Fed officials reinforce the tough message of slowing inflation by raising interest rates

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recession fears

The flexible labor market has so far optimists – and Federal Reserve officials – argued that the economy can avoid a so-called hard landing as monetary policy continues to tighten.

Also read: Stock market investors face 3 recession scenarios in 2023

Still, investors anticipate a recession as early as 2023, Sam Stovall, chief investment analyst at CFRA, said in a note Wednesday, as evidenced by the three-quarters drop in expected S&P 500 earnings and continued defensive sentiments for the sector. . The severity of the recession remains in question. Expect it to be mild. “

The history of the bear market for the S&P 500 dates back to January 3, 2022, when it closed at a record high before starting to slide. It ended with an annual loss of 19.4%.

“The average bear market since World War II lasted 14 months and resulted in a decline of 35.7% from the previous high,” analysts at Glenmede wrote in a December note.

“At about 12 months and 20%, the current bear market appears to be close to two-thirds of the way through a typical bear market decline. The current market appears to be following a similar trajectory to the average historical bear market to date.” Based on past trends, in On average, bear markets don’t go down until after a recession begins, but before a recession ends.”

Related: How long will stocks stay in a bear market? Wells Fargo says it depends if a recession hits