Q1 2023 Market Perspective
2022 was a difficult year for the stock market, with several issues contributing to its downfall. Inflation, rising interest rates, supply-chain disruptions, a tight labor market, and the Russian invasion of Ukraine created tension, resulting in both equities and fixed income ending with negative returns for the year. As we look ahead to 2023, the focus will likely be on inflation and mitigating the effects of a potential recession. In addition, we expect to see additional interest hikes from the Federal Reserve to slow the economy and to pivot in the latter part of the year, which could push the stock market into higher territory from last year. However, it will not be a smooth ride as volatility will continue throughout the year.
Last year’s economic turbulence has left many of us unsure about where we are headed. As a result, inflation has been slowly declining; CPI came at 6.5% for December, a decrease of 2.6% from its peak of 9.1% in June. The reduction in inflation is due to the Federal Reserve tightening policy to reduce inflation.
Looking at other economic indicators, GDP for Q3 2022 saw a significant increase of 3.2% after two consecutive quarters of negative GDP. According to the Bureau of Economic Analysis, consumer spending slightly increased by .1% in November, which is reflected by a .6% decrease in spending on goods and a .3% increase in spending on services. Nonfarm payroll employment increased by 223,000 in December, and the unemployment rate decreased to 3.5%, a 2-percentage point decrease from last month’s reading which the US Bureau of Labor Statistics posted. The labor market continues to remain strong. However, we are starting to see massive layoffs, mostly coming from the tech sector, but at the same time, others are experiencing a shortage of workers. Altogether, this creates challenges as people looking for jobs in those high-demand sectors expect higher pay, and with more money in their pockets, people spend more. In addition, lingering COVID economic issues and new geopolitical problems have made it more challenging to tackle existing issues. Nevertheless, the US economy continues to be resilient in the grand scheme. Therefore, although a recession is still probable, the severity of it might not be as detrimental as we expect it to be. Consequently, we remain optimistic as recent economic reports have given us positive news.
Economic growth has remained constant, but we foresee a slowdown. As a result, the Federal Reserve may re-evaluate its monetary policy plan to bring down inflation until the end of 2023 or the start of 2024. With a tight labor market, the Federal Reserve needs to be more cautious when they begin to pivot, as bringing down interest rates too quickly could reaccelerate inflation and create more damage in the long term. So far, we are on the right path of reducing inflation and keeping unemployment low. Per the Federal Reserve’s minutes, we expect another .50% increase in interest rates by the end of January. As of January 9th, 2023, the Federal funds rate range is 4.25%-4.75%. Although we are approaching a peak, future economic reports will determine the outlook for the remainder of the year. Currently, the real estate market is being affected the most as the 30-year mortgage rates are still higher than they were ten years ago, but we’ve started to see a slight decline over the last two months. The NAHB Housing Market Index, which measures homebuilders’ confidence, has declined to 31 in December 2022, compared to 83 back in January 2022. This is due to high mortgage rates, declining prices of single-family homes, and decreased demand. Even though housing prices have fallen, buyers are reluctant to buy as mortgage rates continue to rise above 6%.
On February 24, 2023, it will have been one year since Russia invaded Ukraine. According to the BBC, the war has claimed the lives of over 22,000 people and has resulted in a humanitarian crisis in the region. This continuing conflict has caused inflation to rise globally, but European countries have been the most affected. They are doing their utmost to ensure they have enough natural gas to get through the winter, and so far, the unseasonably warm weather and the search for other gas sources have helped keep the crisis from escalating. Nonetheless, until the Russia/Ukraine battle is sorted out, the energy crisis will remain, and if it drags on, it could worsen the level of recession for the EU. In addition, the unresolved conflict is creating short-term challenges for US exporters, experiencing lower demands and a strong dollar. We don’t envision a peaceful outcome soon, as the two parties have expressed conflicting objectives.
At the end of 2022, China eased the stringent "zero-COVID" measures they had in place for almost three years. As a result, economists anticipate that the country's reopening in late March 2023 will bring China's GDP growth back up to 5% or 6% after it had dropped to under 3% due to the closures. However, the country has seen a renewed spike in COVID cases, putting pressure on the hospitals and uncertainty about reopening in March. Although reports from China suggest that the peak of the disease has passed, it remains to be seen how the nation will handle this new wave of infection and what effect it will have on the economy.
The tension between China and the US continues to grow regarding defense and economic issues. In response to Speaker Nancy Pelosi's visit to Taiwan, the Chinese government conducted 11 missile launch drills targeting surrounding areas of the Taiwan Strait to show their disapproval. Taiwan plays an essential role in the global economy due to its geographical location, large international trade system, and status as the primary producer of semiconductors (accounting for 92% of its global supply). With President Xi Jinping now in his third five-year term as leader of China, the US must take steps to manage their relationship and make known the consequences of any attack on Taiwan. This is an ongoing situation that will most likely remain tense.
As a new year begins, we often reflect on the good and the bad and how we can improve ourselves. Most individuals create a plan and prepare for what is ahead. During market volatility, uncertainty, and continuous change in the global economy, we at Corinthian often prepare and take preventive measures during changing market cycles. Ironically speaking, we are experiencing heavy storms ourselves. We cannot dictate who will and will not be affected. As you prepare to prevent your home from flooding, we protect our
portfolios by re-evaluating current market conditions. Our forecast for 2023 does not differentiate much from last year’s outlook. Value is still looking for favorable overgrowth, and short-duration bonds outperform long-term bonds. In addition, we see some shifts in the market as commodities are starting to trend down and internationals are trending up. Still, we must remember that these are riskier and more volatile sectors and may or may not be suitable for your portfolio. Our focus remains on long-term investing. Historically the S&P has recovered from downturns. Over the last 90+ years, about 9% of those calendar years have been a negative year followed by a negative year, so the probability of having another down year seems very low. Like the weather, the market has its seasons, and as the saying goes, “There is always sunshine after the storm.”
Advisory services offered through Corinthian Wealth Management, INC. an SEC Registered Investment Advisor.
Employment Situation Summary, U.S. Bureau of Labor Statistics. Posted January 6th, 2023. https://www.bls.gov/news.release/empsit.nr0.htm
United States NAHB Housing Market Index https://tradingeconomics.com/united-states/nahb-housing-market-index
Goldman Sachs Asset Management. Market Monitor, January 6th, 2023. https://www.gsam.com/content/gsam/us/en/advisors/market-insights/market-strategy/global-market-monitor/2023/market_monitor_010623.html
“The Anatomy of a Recession: What to Look for and Where We’re Headed” Clearbridge Investments. Q4 2022. Webinar. January 10th, 2023.