Financial Market Annual Report 2023 by Capital Street Fx – 01 January 2023
31 Dec 2022
Global Market Snapshot
Continued “Bad news is good news” drove the November rally
Domestic equities posted positive returns in November, with all major indices recording gains. The S&P 500 ended November with a 5.6% total return and recorded its first back-to-back monthly positive return since August 2021. A larger-than-expected drop in inflation, weaker economic data and a shift toward a divided federal government supported a market rally throughout the month. While equity and bond market volatility declined in November, we believe ongoing uncertainty around monetary policy, the path of inflation, and geopolitical tensions may introduce periods of volatility over the foreseeable future.
The S&P 500 delivered its best single-day return of the year on November 10, coincidentally also 5.6%, on the same day as the monthly Consumer Price Index (CPI) report. For the first time this year, CPI not only decelerated from the prior month to 7.7%, falling to its lowest level since January, but it also came in below the consensus estimate of 7.9%. While still far from the Federal Reserve’s (Fed) 2% inflation target, investor sentiment has been so negative for so long that it was enough to merit a rally for the remainder of the month.
Markets received plenty of “bad news is good news” reports over the month, starting with the Institute for Supply Management Purchasing Managers’ Index (PMI), which fell to 50.2, the lowest level since May 2020. While readings above 50 indicate manufacturing activity is expanding, the reading published on December 1 fell to 49.0, suggesting activity is beginning to contract. In addition, consumer sentiment, as measured by the University of Michigan, Conference Board, and National Federation of Independent Business Small Business Optimism surveys, has fallen rapidly as inflation remains a top concern among consumers. In our view, while economic growth is beginning to show signs of fatigue, the Fed is far more concerned about inflationary pressures becoming structural, hence its urgency to continue aggressively raising rates and curb inflation.
The US Stock market has lost $11.7 trillion in market cap from its January high. (CNBC)
US consumer sentiment is at the lowest level in more than 50 years: (University of Michigan)
Developed International Markets
Markets rally on dollar weakness, but outlook remains cautious
Developed international equities also rallied in November due to solid earnings reports, a weaker U.S. dollar, and hopes that central banks will soon begin slowing the pace of rate hikes. Despite continued inflationary challenges in the Eurozone and the U.K., the MSCI World ex-USA index rose 10.7% during the month, outpacing the S&P 500. More than 40% of the index gains were attributed to the dollar weakening relative to major currencies, as measured by the U.S. Dollar Index, which was down nearly 5%.
European economic data was mixed for the month, with PMI data continuing to move further into contraction territory to 46.4, the lowest level since 2020. While retail sales and industrial production beat consensus estimates and accelerated from the prior month, the data is from September and may not reflect the rapidly slowing growth occurring across most of the continent since then. That said, consumer inflation for the Eurozone decelerated on a year-over-year basis for the first time since June 2021, a welcome sign for investors. However, we continue to believe Europe faces considerable hardship from elevated inflation, with the most recent reading at 10.6%.
Despite weakening economic data, European Central Bank (ECB) Chair Christine Lagarde gave a speech on November 28 in which she mentioned, “jumbo interest rates will continue to rise even as economic activity slows down in the face of record inflation.” As such, consensus still expects the ECB will raise rates through the June 2023 committee meeting, at which time the policy rate would be 2.75%, its highest level since 2008.
Europe remains in the throes of an energy-driven cost-of-living crisis, with new sanctions against Russia going into effect on December 5. However, declining energy prices due a warm November and gas storages that are close to capacity support hopes that the region might not be facing a winter downturn as severe as previously anticipated. That said, dependence on a positive weather forecast shows the precarious nature of the economic outlook for Europe in the short term. We remain cautious on economic activity in the coming months, which we expect to be largely dictated by the path of fuel costs.
Amid strong performance, China shines on hopes of easing zero-COVID policies
Emerging market (EM) equities were up 14.9% in November, outperforming both developed international and U.S. large-cap markets. This month’s rally helped provide some relief from EM’s recent performance challenges. Because earnings revisions already reflect key headwinds for the asset class over the next 12 months, in our view, the valuation and 2023 earnings outlook remain attractive. At a forward P/E of 10.1x, EM’s relative valuation compared to developed international is near its most attractive point over the past 10 years, even with its stronger growth outlook.
China was the star performer with gains of nearly 30%, but most other EM Asia countries delivered double-digit returns as well. Rumors that China may ease its zero-COVID policy and the government’s 16-point plan to support its property market were key catalysts for the rebound. While China’s zero-COVID policy has been an overhang on the economy and the market, recent protests over strict COVID-19 containment measures caused the government to concede to loosened restrictions in December. Given this change in policy, the country’s COVID-19 cases could increase in the near term. Despite this uncertainty, we believe a full reopening of China is inevitable. However, both the unknown pace of and response to reopening could create more market volatility along the way.
2023 Global Strategy Outlook
Fed Policy Will Continue to Drive Asset Prices in 2023
Monetary policy will continue to be the key driver of asset prices in 2023. Fed policy has the potential to cut back earnings, increase default risks, widen credit spreads, and increase the chances for a recession. Why? Well, as stated by the Fed, rate hikes work, and there are often “long and variable lags” between a monetary policy action and its impact on the economy. The Fed’s mission is to help lower inflation to its 2% to 2.5% target and keep it there, durably.
Inflation Remains Stubbornly High
The pandemic caused supply shortages and excess demand driven by fiscal stimulus. In turn, the Fed tightened monetary policy to address skyrocketing inflation. The Fed initially believed supply shortage inflation would melt away as the pandemic ended and supply chains reopened. Goods inflation did fall sharply late in 2022, but service sector inflation remained stubbornly high and became more difficult to tame. The culprit? A tight labor market kept wage inflation elevated. The Fed turned its attention to weakening the labor market–enough but not by too much.
key takeaways from the 2023 Strategy Outlook:
- 10-year Treasury yields will end 2023 at 3.5% vs. a 14-year high of 4.22% in October 2022.
- With favorable pricing, securitized products, such as mortgage-backed securities, will offer upside.
- S&P 500 will tread water, ending 2023 around 3,900, but with material swings along the way.
- The U.S. dollar will peak in 2022 and declines through 2023.
- Emerging-market and Japanese equities could deliver double-digit returns.
- Oil will outperform gold and copper, with Brent crude, the global oil benchmark, ending 2023 at $110.
Overall, investors will need to be more tactical and pay close attention to the economy, legislative and regulatory policy, corporate earnings, and valuations, says Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. “Because we are closer to the end of the cycle at this point,” Wilson says, “trends for these key variables can zig and zag before the final path is clear. While flexibility is always important to successful investing, it’s critical now.”
- Bear Market
- Record credit card debt
- Low saving rate
- Interest rates rising
- Record national debt
- Ukraine war
- Energy shortages
- High home costs
- High rents
- Falling net profits
- Divisive politics
- Out-of-control government spending
- Terrible immigration policy
GLOBAL INVESTMENT OUTLOOK KEY POINTS:
Bonds Make a Comeback
In 2023, with interest rates set to decline, conditions bode well for stable and attractive bonds, as prices move in the opposite direction of yields. Morgan Stanley fixed-income strategists forecast high single-digit returns through the end of 2023 in German Bunds, Italian Government bonds (BTPs), and European investment-grade bonds, as well as in Treasuries, investment-grade bonds, municipal bonds, mortgage-backed securities issued by government-sponsored agencies and AAA-rated securities in the U.S.
Trends Point to High-Yield Equities
Equities next year, however, are headed for continued volatility, and we forecast the S&P 500 ending next year roughly where it started, at around 3,900. “Consensus earnings estimates are simply too high, to the point where we think companies will hoard labour and see operating margins compress in a very slow-growth economy,” says Wilson. To that end, investors should consider the higher-yielding parts of the equities market, including consumer staples, financials, healthcare, and utilities.
European equities could offer a modest upside, with a forecasted 6.3% total return over 2023 as lower inflation nudges stock valuations higher. “This should ultimately more than offset the 10% earnings-per-share decline we expect from weaker top-line growth and material margin disappointment,” says Graham Secker, Head of European and U.K. Equity Strategy. Financials and energy are more likely to perform well in this environment, he says.
Emerging Markets and Japan Early to Recover
This has been a major bear market for emerging markets, but the tide could be turning, says Jonathan Garner, Chief Asia, and Emerging Market Equity Strategist. “Valuations are clearly cheap, and cyclical winds are shifting in Favor of emerging markets as global inflation eases more quickly than expected, the Fed stops hiking rates and the U.S. dollar declines,” he says, says, adding that over the last several economic cycles, emerging markets have recovered before U.S. markets.
US Stock Market 2023
Some of the world’s biggest investors predict that stocks will see low double-digit gains next year, which would bring relief after global equities suffered their worst loss since 2008.
Amid recent optimism that inflation has peaked — and that the Federal Reserve could soon start to change its tone— 71% of respondents in a Bloomberg News survey expect equities to rise, versus 19% forecasting declines. For those seeing gains, the average response was a 10% return.
The informal survey of 134 fund managers incorporates the views of major investors including BlackRock Inc., Goldman Sachs Asset Management, and Amundi SA. It provides an insight into the big themes and hurdles they expect to be grappling with in 2023 after inflation, the war in Ukraine, and hawkish central banks battered equity returns this year.
The stock market could be derailed again by stubbornly high inflation or a deep recession, however. Those are the top worries for the upcoming year, cited by 48% and 45% of participants, respectively. Stocks could also reach new lows early in 2023, with many seeing gains skewed to the second half.
“Even though we might face a recession and falling profits, we have already discounted part of it in 2022,” said Pia Haak, chief investment officer at Swedbank Robur, Sweden’s biggest fund manager. “We will have better visibility coming into 2023 and this will hopefully help markets.”
Even after a recent rally, the MSCI All-Country World Index is on track for its worst year since the global financial crisis in 2008. The S&P 500 will probably end 2022 with a similarly poor performance.
The energy crisis in Europe and signs of slower economic growth have kept a lid on stock prices even as China begins to ease some of its tough Covid curbs. Plus, there are growing fears that the slowdown already underway in many economies will eventually take a bite out of earnings.
The Bloomberg survey was conducted by reporters who reached out to fund managers and strategists at major investment firms between Nov. 29 and Dec. 7. Last year, a similar survey predicted that aggressive policy tightening by central banks would be the biggest threat to stocks in 2022.
Factors influencing U.S. equities in 2023 include inflation, the recession, and profits
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.
The S&P 500 is down nearly 20% year-to-date with only a few trading days left in 2022, on pace for its biggest calendar-year drop since 2008. The carnage has been even more severe for the Nasdaq Composite, which had tumbled by nearly 34% so far for the year.
High-profile casualties include the once-soaring shares of Amazon.com Inc (NASDAQ: AMZN), which have slumped around 50% this year, while those of Tesla (NASDAQ: TSLA) Inc is down some 70% and Facebook parent Meta Platforms Inc (NASDAQ: META) Shares have lost about 65%. Meanwhile, energy stocks have bucked the trend by posting eye-popping gains.
Here is a look at some of the big themes for the U.S. stock market in 2023.
RECESSION OR SOFT LANDING?
Perhaps the biggest question that will sway stocks as the new year begins is whether the economy is headed for a recession, as many investors are expecting.
If a recession starts next year, stocks could be set for another slide: A bear market has never bottomed before the beginning of a recession, historic data showed.
Recessions tend to hit stocks hard, with the S&P 500 falling an average of 29% during recessions since World War Two, according to Truest Advisory Services. Those declines, however, have usually been followed by a strong rebound.
ARE PROFITS AT RISK?
Investors are also concerned that corporate earnings estimates may not have fully factored in a potential slowdown, leaving more downside for stocks.
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.
The Fed’s rate hikes have pushed up bond yields and created competition for equities, flying in the face of the low-yield environment that predominated for more than a decade and gave rise to the acronym “TINA,” or “there is no alternative” to stocks.
Yields on the 10-year Treasury Inflation-Protected Securities (TIPS) – also known as real yields because they strip out projected inflation – recently stood at around 1.5%, after hitting their highest level in over a decade in October.
Still, some investors have noted that stocks fared well in past periods when yields were even higher.
DOLLAR MAKING A DENT
The dollar’s surge against other currencies this year hurt the earnings of many U.S. companies, making it more expensive for multinationals to convert their earnings back into their home currency.
The greenback has pared some of those gains in recent weeks and a continued reversal would depend in part on investor perceptions of how hawkish the Fed will be relative to other global central banks.
Top Crypto Predictions to Watch Out For in 2023
Past Performance of the Crypto Market Suggests 2023 Will Be a Good Year.
The crypto market has been on a roller coaster in the past few years, with prices rising and falling quickly. Despite the volatility, however, it is undeniable that the crypto industry has shown tremendous growth in the past few years. Industry professionals are optimistic that this trend will continue into 2023, as past performance of crypto markets suggests that this will be a good year for virtual currencies. This bodes well for investors who have already been involved in the crypto markets and those who are just getting started.
Analysts and market researchers have studied the performance of the cryptocurrency market since its inception and have concluded that the market is showing steady growth. This continued growth has led many to anticipate that 2023 will be a good year for the crypto industry as confidence in the technology increases and more businesses decide to adopt it. As more companies adopt blockchain technology, the need for skilled professionals to work in the sector will increase. This will create more job opportunities, which could foster further industry growth.
The Bear Market Will Be Over at the Beginning of 2023.
After a prolonged bear market in 2020, analysts and investors are optimistic that the crypto markets will rally in 2023. This positive outlook has been bolstered by the fact that the industry has managed to weather the storm and show signs of recovery even in difficult times. As such, investors and traders can look forward to improved performance in the coming year, which could lead to higher returns and increased liquidity. Moreover, more businesses will likely join the crypto ecosystem in 2023, driving the adoption of virtual currencies and blockchain technology even further.
Once the Crypto Market Is at the Bottom, a Bull Market Will Happen
A bottom in the crypto market is expected to be followed by a bull market as investors and traders take advantage of a potentially lower-risk opportunity. This could result in a surge in profits and liquidity, further strengthening the industry. Additionally, new entrants may be drawn to the space with the assurance of increased liquidity, potentially leading to more businesses joining the crypto ecosystem. Equally important is the fact that consumer confidence in digital currencies and blockchain technology could grow due to the improved performance of the markets, leading to more people using virtual coins on a day-to-day basis.
TOP CRYPTO IN 2023:
- BITCOIN (BTC)
As of this writing, Bitcoin trades at $16,600 with a 1% loss in the last 24 hours. On higher timeframes, the cryptocurrency records similar losses. Across the crypto market, red is the predominant color as significant assets follow BTC into the downside.
The decline in trading volume due to the holiday season has led the Bitcoin price to move sideways. This status quo is poised to change in early January when market participants return to active trading.
On a positive note, February is one of Bitcoin’s best-performing assets. Last year, the Bitcoin price ascended from a new all-time high of around $30,000 to $60,000. As seen in the chart above, February brought double-digit gains for BTC since 2021.
Thus, while BTC might see a negative first month in 2023, February and March might become more favorable. This possible future performance coincides with some positive developments in the macroeconomic landscape, including a decrease in inflation and a short-term cap in interest rates hike from the U.S. Federal Reserve (Fed).
However, these conditions could apply for a limited time. News BTC reported that the traditional market would determine much of what happens with the Bitcoin price and the crypto market.
In 2022, Ethereum ticked off many boxes on its list toward making a worldwide laptop and suburbanized financial set-up. Most notably, the second-largest blockchain finally completed its radical shift to a replacement, immensely a lot of energy-friendly system for powering its network. But the year was conjointly marked with issues – from considerations around censorship to record-shattering hacks on Ethereum-linked infrastructure. Let’s dive into the key themes and events that have outlined Ethereum’s rollercoaster year. Any recap of Ethereum’s 2022 would be incomplete if not to mention the Merge – the blockchain’s large, years-in-the-making upgrade to a lot of energy-efficient systems for processing transactions. Ethereum’s switch to proof-of-stake from proof-of-work, which happened in a Gregorian calendar month, marked an enormous reduction to the network’s energy footprint, ditching a power-hungry crypto mining system in favor of a replacement technique for the provision and confirmatory transactions on the blockchain.
These are 2023′s top stock picks:
- AMAZON (AMZN)
Amazon is a top player in three areas where we see ample secular tailwinds: the cloud, digital advertising, and e-commerce. Perhaps more importantly, each of these businesses has a wide economic moat. Regarding the cloud, AMZN’s Web Services business is the market leader in cloud infrastructure services. This business benefits from high customer switching costs as cloud services are typically one of the last expenses a business might cut during challenging times. Moreover, the scale of AMZN’s web services business provides many cost advantages as very few companies can compete with AMZN’s investment spend and first-mover advantage.
2. Becton Dickinson (BDX)
Becton Dickinson is a global supplier of medical devices, hospital supplies, diagnostic equipment, and medication management systems to hospitals and labs. Management estimates that 90% of patients who enter an acute care setting are touched by at least one BDX product. Becton has faced a variety of company-specific headwinds in recent years that were exacerbated by the pandemic. That said, the company played a key role during the pandemic as the world’s leading manufacturer of syringes and needles and as one of the largest Covid-19 testing providers. Importantly, management has been reinvesting the proceeds from the Covid-19 windfall back into the business. Furthermore, they have divested slower-growing businesses and have made several tuck-in acquisitions over the past couple of years.
3. NVIDIA (NVDA)
NVIDIA reconfirms its plans for CES 2023. According to what we all know; the event can primarily specialize in GeForce RTX forty mobile graphics. This includes RTX 4090, 4080, 4070, and presumably the mid-range series also. simply nowadays there was a leak confirming the specs of the RTX 4080 portable computer GPU specs. Furthermore, NVIDIA is to (re) introduce its desktop GeForce RTX 4070 graphics card. this can be a similar card that was canceled as RTX 4080 12GB around two months past. NVIDIA completed that having 2 cards sharing a similar product name, however abundant completely different performance levels were confusing enough to prorogue and rename the GPU. It is expected that the mobile RTX forty series square measure to launch in early Jan even as portable computer manufacturers can begin revealing their portable computer styles. once it involves the desktop 4070 It model, this card is to launch on Jan fifth, thus simply two days when the official announcement at the “GeForce Beyond” event.
4. MICROSOFT (MSFT)
Microsoft is one of the largest technology companies in the world. It has successfully pivoted from a Windows PC-first world to the cloud. The company has become a strategic partner in enterprise digital transformations through its cloud, app, and infrastructure, as well as its artificial intelligence offerings. There is a long runway remaining for cloud growth as companies slowly deal with legacy investments that still drive value but are not cloud-based. MSFT is uniquely positioned to grow its wallet share of corporate IT budgets in this hybrid world. It is also encountering new opportunities in security, compliance, and workflow, and the transition to subscription-based sales is no longer a headwind to free cash flow growth. Shares trade at 23x the CY23 EPS estimate. We think the premium valuation is justified given the above-trend growth, exposure to secular trends, and strong balance sheet. Moreover, compared to software peers, the valuation is quite reasonable. The dividend yield is 1.1%.
5. Alphabet (GOOGL)
Alphabet is a holding company that owns several subsidiaries with the most visible and profitable being Google, the internet services giant. Google search is the world’s most popular search engine, and Android is the most widely used mobile phone operating software. Moreover, the company has nine products with more than a billion users: Search, Android, Chrome, Gmail, Drive, Maps, Play Store, YouTube, and Photos. Search, display, and video advertising account for most of the company’s revenue, with smaller, but faster-growing Cloud (enterprise services) and Play Store, subscriptions, and hardware accounting for the rest. We saw some softness in ad spending on concerns over economic weakness and platform privacy changes, but with advertising dollars continuing to shift to digital formats, the valuation looks compelling. Cloud migration remains a secular growth story and should allow the Google Cloud Platform to sustain its rapid growth in the coming years. The company has arguably the best balance sheet in the world with more than $100 billion in cash and investments net of debt. Shares trade at 16.9x CY 23 EPS. There are risks around government regulation, but we see that taking several years to play out.