Nick Pirsos, Wealth Advisor at MRA Advisory Group, published his updated view of equity markets. You are invited to schedule a complimentary first meeting (via the link below) to discuss his views in greater detail and to learn how to best optimize your portfolio to better attain your retirement goals.
No Santa Claus rally unfolded in December with most global equity markets down for the month, returning the gains recorded in November. The lone exception was Hong Kong up 5.6%, benefitting late in December from a Chinese Covid policy shift to less restrictive public mobility.
For the year, 2022 turned in among the top five worst performances on record as most regional valuations declined between 10%-34%. The UK was the global winner down only 0.7%. We ascribe relatively better fiscal conditions and a corresponding stable currency as the key drivers.
2023 Outlook
Economy:
The US experienced a technical recession in the 1H22 and we believe is in the balance for a possible NBER-defined recession as we enter the new year.
The 3Q22 reading showed a modest recovery and at the end of January, the initial estimate of 4Q22 GDP will be released allowing for a more discernable picture to emerge. We would not be surprised to see a positive print again, though do expect a moderation from the third quarter. Either way, we expect any reported growth will only provide further material for continued interest rate increases from the Fed. The lone positive being at reduced levels from the recent record tightening.
While much attention in 2022 was paid to GDP trends, less emphasis was on US employment levels, which have been sending conflicting signals. The widely looked at National Establishment Survey pointed to a steady employment recovery, however, the Household Survey pointed to steady employment recovery, however, the Household Survey painted a stark contradictory jobs view. The new year should shed clarity on what has transpired, but we expect not until 2Q23. More importantly, will be the expectation surrounding the direction of employment travel in the new year and the Fed’s messaging around it.
Inflation levels we expect will improve in 2023 versus last year but will remain stubbornly above trend in the 4% range and is expected to continue to impact interest rate levels for the early part of 2023.
Stock Market: Equity prices enter the new year at appropriate valuation levels relative to both long-term market appreciation gains, as well as, current interest rates and the 2023 consensus EPS growth forecast of 5%.
Our greater concern is possible EPS estimate downward revisions during 2023, rather than material interest rate increases, which we believe expectations are largely factored in and could potentially see a moderate positive surprise if inflation cools faster than expected. Earnings forecasts however could see a 10% point swing from +5% growth should either the economy prove already in a recession, given the conflicting employment figures, and/or the Fed compounding matters with ongoing tighter/longer than necessary, in our view, monetary conditions into a weakening economy.
We note the Federal Reserve appears desirous of a business contraction to combat long-term above-trend inflation. The risk is can they manage towards a mild recession? History has proved otherwise and note that they erred in their most recent 2021 transitory inflation call.
A mixture of intangible items will also impact equity prices throughout the year. Divided US government is a fundamental positive but we expect added volatility at times from difficult Budget discussions. Year three of US Presidential terms have historically been favorable stock market years. Last week’s China re-opening should aid global growth but the pace is unclear as manufacturers attempt to diversify supply chains. The Russia / Ukraine conflict remains a wild card but ongoing military expenditures supports economic growth, while a surprise geo-political resolution would bring oil price stability and remove an investor sentiment headwind.
Conclusion:
In 4Q22 we positioned for a trading bounce, which manifested, and believe there could be some shelf life remaining on that call as we start 2023.
The recent S&P lows of 3,491 established in October 2022 however could eventually be tested and possibly penetrated if FED tightening and/or the economic slowdown accelerates.
In terms of a sustainable market recovery, at a minimum, as Rocker Bon Jovi belts, “we are halfway there”. With a longer-term view in mind, we expect the year to plant the seeds for the next recovery. The two-year/ten-year Treasury yield spread, which entered negative territory last July and hit a recent low of -80 basis points in early December has quickly recovered to -50 basis points at year-end. A steady recovery would point to successful Fed economic management and lead to an earlier and stronger than consensus expected market recovery.
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Advisory Services are offered through MRA Advisory Group, a Registered Investment Adviser. This information was developed by Broadridge, an independent third party. It is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. The investments and strategies mentioned may not be suitable for all investors. Past performance is no guarantee of future results. Nothing herein, nor any attachment, shall be considered to constitute (i) an offer to sell, nor a solicitation of an offer to purchase, any security, or (ii) tax or legal advice.