In the flash of an eye, we are now into the brand new year 2023. Alright, it wasn't exactly a flash, especially not when most portfolios are sitting in the red after a whole year. This is something many would not be used to since the Great Financial Crisis in 2008-09. Any corrections then have been short-lived and followed by strong rebounds leading to quick recoveries.
For the majority of those who invest, I believed 2022 marks one of the toughest years they faced. Inflation hit a high not seen since the 70s. In a desperate effort to bring inflation back down after being late to react, central banks worldwide stepped on the pedal and hiked rates at a speed that rocked the financial markets. With Covid reopening across major economies, a sharp surge in demand and a slow recovery across the workforce and operations led to a demand and supply imbalance that kept wages and prices high. And amidst all these, geopolitical tensions added to the woes - there is the US vs China and then Ukraine vs Russia. Then there is China, the world's manufacturing house, which pursued a strict zero Covid policy until recently. That led to shutdowns that aggravates the supply issues in 2022.
So what is going to happen this year for the US? Let us hear the views of the major banks!
Economic Growth
It is a mixed bag of predictions in this area. The banks' views range anywhere from a likely recession to a soft landing scenario where growth just slowed. Goldman Sachs is one of the banks which seemed confident that a recession in the US can be avoided. Their reasons are that recent GDP and jobs data are nowhere close to being recessionary. And real disposable income is turning up after bottoming in the 1H of 2022 which they believed will drive the economy to avoid recession in 2023. But overall, what is clear is that growth will slow and the general consensus across the banks seems to tilt more towards a mild recession.
Inflation
Inflation is one of the key worries through 2022 and it is likely to remain a highlight for 2023. But on a good note, most of the banks are of the view that inflation will moderate further in 2023. These run on the back of falling and stabilizing commodity prices and the easing of demand and supply chain issues. And with China reopening, supply issues look likely to alleviate further. The main challenge is whether the labor market will cool enough to prevent wages from spiraling higher which is what central banks are also closely watching. There are expectations that the lagged dampening effects from the rate hikes will start seeping deeper into the economy in 2023 to further curb the demand and cool the job market. But having said that, all still expect inflation to remain above the US Fed's target.
Interest Rates
Interest rates outlook is another closely watched parameter. The consensus here is that most banks expect the Fed Funds rates to go higher further in 2023 and it is going to stay there for a while more. Most of the banks do not expect interest rates to be cut in 2023 or at least I don't see that being mentioned. This is not surprising and is in line with Fed's message. But the good news is that these hikes are pretty much already priced into the markets. The Fed Funds futures indicate a hike of up to 5.25% in the 1H 2023 while pressures seemed to ease off in 2H 2023 where rates might come back down to 4.75% or 5%.
Financial Markets
For investors, what is really of interest is what would the impact of these macro factors be on the financial markets. Is the worst over for stocks and bonds? Or will we see further deterioration? Again, there is a spread of views on this. On the negative side, Barclays thinks the worst is not yet over for the stock market which might see a further drop in the 1H of 2023 but feels that downside for bonds is now limited. Then on the positive end, JP Morgan is of the view that the worst in terms of volatility is behind us, and both stocks and bonds are looking increasingly attractive
While most banks are cautious not to word things too definitively, my general interpretation is that they do expect 2023 to present more opportunities and fare better given that much has already been priced into the market. This is in line with most of their views that any recession in the US, if any, is likely to be mild. Of course, the risks remain. We may underestimate the impact of the Fed's rapid rate increase which takes time for the effects to work their way into the economy. And they do have a track record of overshooting and causing more damage than necessary. In addition, how the job market performs, how inflation levels play out, and how the global economic scenes ensue, will influence what action the US Fed will take regarding future interest rates. Any unexpected development can knock things off course.
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