The tide of radical interest rate hikes just receded, the tide of recessionary trading is gaining momentum, under the impact of multiple negative rounds, U.S. stocks this year, the performance of declining, as of December 16, EST U.S. stocks closed, the Dow fell 9.41%, the Nasdaq fell 31.57%, the S&P 500 fell 19.17%, the next Christmas is also gloomy shroud.
Lv Haomin, a researcher at the Banking Research Institute, told the 21st Century Business Herald that uncertainty about the U.S. economic outlook continues to rise and the stock market may continue to come under pressure. The Federal Reserve has sharply lowered its economic growth forecast for 2023. The latest summary of economic projections (SEP) shows that the Fed lowered the U.S. GDP growth rate to 0.5% in 2023, less than half of the forecast level in September, both lower than the forecast long-term growth rate of 1.8%. This suggests that rising interest rates and high inflation are putting pressure on economic activity, and that below-trend U.S. economic growth over the next two years is the probable scenario.
To make matters worse, it's not just the upcoming Christmas season, but the performance of U.S. stocks next year may not be promising either. Sue Trinh, co-head of Global Macro Strategy at Manulife Investment Management, told 21st Century Business Herald that in a macro environment of high global inflation, uncertainty caused by a possible topping of interest rates and rising risk of a global recession, the market may see a series of sharp fluctuations in the first half of 2023.
The "Santa Claus market" may not be repeated this year
The "Santa Claus quote" comes from the 1972 Stock Trader's Almanac author Yale Hirsch's finding that U.S. stocks are likely to perform strongly in the last five trading days of each year and the first two trading days of the following year.
But in the continued impact of austerity, the recessionary gloom is getting thicker, this year's "Santa Claus market" seems increasingly remote.
Last week the Federal Reserve raised the benchmark interest rate by 50 basis points to 4.25%-4.5%, although the Fed slowed the pace of interest rate hikes, but high interest rates or will be more durable. Lv Haomin told reporters that in 2023, as inflation falls back and the risk of recession rises, the Fed's rate hike may slow further to 25 basis points. However, the high interest rate environment may continue for a period of time, the U.S. core inflation is slow to fall, the level of inflation will be difficult to fall rapidly in the short term, in order to calm inflation, the Fed will continue to raise interest rates in the future.
And with the Fed rate hikes into the second half, the market has become increasingly concerned about the ensuing economic impact. Bob Schwartz, senior economist at the Oxford Economics Institute, told 21st Century Business Herald that the Fed's firm commitment to curb inflation, consumer data, the economy's main growth driver, is contracting, fears of a recession have intensified and the stock market has suffered a shock.
In addition to the impact of fundamentals, the end-of-quarter rebalancing of large funds this year will also affect the performance of U.S. stocks around Christmas. Pension funds and sovereign wealth funds, the pillars of the investment community, typically rebalance their market exposure each quarter to reach their set ratio of stocks to bonds in their portfolios, such as the classic 60/40 strategy: 60% in stocks and 40% in bonds. And despite last week's decline in U.S. stocks, the overall performance in the fourth quarter remained solid, with values rising relative to other asset classes, which will force fund managers who need to strictly adhere to weight allocation principles to sell stocks to achieve the stated goal of diversification, with fund managers of large global funds likely to sell as much as $100 billion of stocks in the final weeks of the year.
Fed monetary policy heightens market concerns
From the recent statements of the Federal Reserve officials, after the previous wave of aggressive rate hikes, the market is about to usher in a painful "dull knife cut" period, the pace of interest rate hikes will slow down, but the peak rate is higher.
Cleveland Fed Governor Meister said she believes the Fed will have to raise interest rates to a level higher than the median of previously announced forecasts. New York Fed Governor Williams, on the other hand, stressed that rate hikes are still likely to exceed current expectations.
And high interest rates may also last longer than expected. San Francisco Fed Governor Daley said the idea that the policy rate will stay at that level for nearly a year after it peaks is "reasonable," and that rates can be kept at their peak for longer if necessary.
Schwartz told reporters that inflation slowed more than expected in November once boosted financial markets, but the Fed's hawkish stance again broke market confidence. In the supply chain continues to heal, consumer spending habits change and economic growth slowdown, inflationary pressures have been reduced, but labor cost growth is too strong, the Fed to achieve the 2% inflation target is not easy, the focus of monetary policy is to cool the job market, recessionary concerns are also increasing, financial markets suffered a shock.
Growth stocks are likely to continue to underperform next year in a high interest rate environment. Lv Haomin said high interest rates depress growth stock valuations, causing stocks to fall under pressure. 2023, in a high interest rate policy environment, U.S. bond yields will oscillate at a high level, as a pricing benchmark, high long-term Treasury yields will not only reduce investors' risk appetite and increase the financing costs for listed companies to repurchase shares through debt issuance, but will also directly lead to lower valuations for growth listed companies, triggering investors It will also directly lead to lower valuation of growth listed companies, triggering investors' fear of high-valued risk assets and bringing downward pressure on stock prices.
Luca Paolini, chief strategist at Pictet Asset Management, believes that a tighter financial environment will shift investors' focus next year from inflation to the risks posed by an economic slowdown, and he is pessimistic about the U.S. stock market in the next three to six months. "A top in inflation is clear, but we expect equity markets to weaken next year. The decline in inflation is likely to be slow and painful, and by no means sufficient for central banks to shift from tightening to easing, which is why we don't expect interest rates to be cut next year. I am more worried about economic growth in 2023 than inflation."
Recession trade gaining momentum
In previous months, bad economic data often became good news for the market, suggesting that the Fed's rate hikes were working as intended: cooling the economy and curbing inflation, and that tightening may no longer need to be as hawkish. But now, more and more investors are becoming more worried about a recession in 2023.
On December 15, the U.S. Department of Commerce released data showing that U.S. retail sales contracted 0.6% in November from a year earlier, below market expectations of -0.2%, compared to 1.3% in October. In addition, core retail sales contracted 0.2% in November from a year earlier, the first decline since March this year, below market expectations of 0.2%, compared with 0.9% in October. And none of the relevant retail sales data were inflation-adjusted.
With the economic pillar of consumption also gradually fall, next year the U.S. recession is almost a foregone conclusion. Lv Haomin told reporters that, in general, the economic outlook determines the long-term trend of the stock market, while the stock market is the barometer of the economy. As the Federal Reserve will continue to raise interest rates to curb inflation, leading to recessionary pressures climbing, the future of the U.S. stock market or further pressure.
Wall Street banks, Bank of America said that although the Federal Reserve rate hikes have slowed, but this does not change the Bank of America's expectations of the U.S. economy into recession, the U.S. economy from the first quarter of 2023 or a mild recession, the U.S. GDP will be negative in 2023.
Meanwhile, Bank of America expects the stock market to plunge 36% next year and remains cautious on some stocks in the Internet space, including Amazon, Alphabet, Meta, EBay and Expedia, among others. There may still be investment opportunities in quality stocks, income stocks and small-cap stocks rather than growth stocks.
Some analysts are also bullish on bank stocks in the context of interest rate hikes. Mike Mayo, senior banking analyst at Wells Fargo, said U.S. bank stocks are on the verge of outperformance, and even if the economy falls into recession, the sector could still soar 50% next year, with interest rate hikes boosting profits. In addition, banks face less credit risk after the reforms introduced after the 2008 financial crisis.
From all indications, under the impact of multiple factors such as austerity and recession fears, U.S. stocks may "stumble" into 2023, but may be expected to turn around later next year.
Deutsche Bank analyst Binky Chadha expects the S&P 500 to plunge to 3,250 points in the third quarter of next year, 19 percent below current levels, before rallying in the fourth quarter and rebounding to 4,500 points by the end of the year, as the United States falls into recession.
Looking ahead, Trinh told reporters that a negative shock from demand looms, causing economic concerns to overshadow inflation, which could pave the way for a dovish stance by the Fed, which may ease policy in the fourth quarter of 2023, and market conditions may be more optimistic in the second half of next year, when headwinds may weaken, bringing more favorable conditions for financial markets.