What Investors Watch Out for in Stock Markets in 2023
U.S. stock investors could not be more eager to turn the page on 2022, a brutal year dominated by market-punishing Federal Reserve rate hikes designed to tamp down the steepest inflation in 40 years.
While optimists are betting on central banks pivoting to interest rate cuts, along with China fully emerging from its Covid isolation and conflict in Europe abating, others are on the lookout for risks that may throw markets back into turmoil.
Below are four scenarios that threaten to bring more trouble for investors in the year ahead.
Entrenched inflation
"The bond market is expecting inflation will pretty neatly come back into zone in 12 months," said Matthew McLennan, co-head of the global value team at First Eagle Investment Management.
But that could be a huge mistake. He believes there is real risk that wage growth and supply-side pressures such as rising energy prices will continue to fuel consumer price increases.
This would rule out a pivot to rate cuts by the Federal Reserve and the European Central Bank, which markets expect in the middle of the year.
Recession
Perhaps the most important question for stocks as the new year begins is whether the economy is headed for a recession, as many investors believe.
If a recession begins next year, stocks could face another downturn: historically, a bear market has never bottomed before the start of a recession.
Recessions tend to hit stocks hard, with the $S&P 500 Index(.SPX.US$ falling an average of 29% during recessions since World War Two, according to Truist Advisory Services.
Corporate profit
Investors are also concerned that corporate earnings estimates may not have fully accounted for a potential slowdown, leaving stocks vulnerable to further declines.
Consensus analyst estimates project S&P 500 earnings to rise 4.4% in 2023, according to Refinitiv IBES. Yet earnings fall by an average annual rate of 24% during recessions, according to Ned Davis Research.
Strong Dollar
The dollar's rise against other currencies this year has harmed the earnings of many American companies, making it more expensive for multinational corporations to convert their earnings back into their home currency.
North American companies reported $34.25 billion in headwinds in Q2 2022, a 134% increase compared to the previous quarter, and 3,583% increase since Q3 2021, according to Kariba's Currency Impact Report.
The greenback's reversal would depend in part on investor perceptions of how hawkish the Fed will be relative to other global central banks.
Is your portfolio prepared for these events?![]()
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Source: Bloomberg, Ned Davis Research, Truist Advisory Services
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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70784737 : The recession is here and big players are trying to fake a rally // secure your money don’t get trapped by their lies of an upturn
GangIsKong : If the Fed Would Quit Making Printer go BURRRRRTTT. .... the Inflation wouldn't be so bad. but hey Just keep spending what we don't have is the DumbOcrats way.
CBSJournal : Bet on sell side only.
stockhustler : been in a recession 6 months already sorry to burst the bubbles