The consensus view amongst leading analysts at Charles Schwab, Goldman Sachs, and Vanguard is the global stock market may continue to experience ongoing, albeit reduced, volatility in 2023, with lower energy prices, improving supply-chain conditions, and diminishing inflationary pressures.
Meanwhile, the Federal Reserve appears poised to aggressively fight inflation through ongoing policy action, raising interest rates further, and intentionally slowing down the U.S. economy in the short-run as a means of achieving its annual inflation target of approximately 2%.
Given the uncertain economic backdrop in the coming months, prudent long-term oriented investors may have ample opportunity to take advantage of acquiring discounted equities, locking in higher yields from income-oriented investments, and position themselves for an eventual market rebound in the years to come.
Read below for a deeper dive:
This past year, the world experienced one of the most rapidly evolving economic and financial market environments in recent history. Aggressive Fed Policy has been a primary driving force on conditions globally, with many central banks raising rates in an effort to combat inflation. This, along with supply-chain disruptions, repeated COVID lockdowns in China, and the War in Ukraine, have caused higher energy and food prices and persistent market volatility.
Despite the general economic malaise, there are a number of positive trends emerging that could give rise to optimism as markets begin to look ahead to 2023.
There are a number of strong factors analysts at Charles Schwab have highlighted for the coming year.
Inflationary pressures appear to be decelerating. Analysts predict we could see a sharper drop in inflation as global supply chains recover and labor markets stabilize. The chart below illustrates the recent downward trend of inflation as measured by CPI.
While a mild recession would not be a surprise, analysts at Goldman Sachs believe the US Economy is likely to achieve a “soft landing.”
While consumer prices in the U.S. are currently up 8.2% year-over-year, Goldman’s economists project prices rising by 2.4% year-over-year by the end of 2023. From their view, the Fed could begin to curb its rate-hiking activity as a result of the slowing economic growth and cooling inflation in the new year.
According to Liz Ann Sonders, Charles Schwab’s Chief Investment Strategist, the current consensus estimate for 2023 S&P 500 earnings is for earnings growth of nearly 5%. Although that has been trimmed from nearly 10% last spring, Schwab’s analysts expect companies to maintain profitability and earnings growth despite the challenging global economic environment.
The Labor Market
One of the key objectives of the Federal Reserve is to reduce inflationary pressures caused by higher wages across the economy. According to analysts at Bloomberg, layoffs are on the rise across various sectors and U.S. job openings fell in October 2022, an indication that the labor market may be cooling.
The last 12 months have seen the fastest increase in the Federal funds rate since 1981 in the U.S., and the fastest increase in European Central Bank rates since the inception of the Eurozone.
Although energy and food prices appear to have peaked earlier in the year, as long as the war in Ukraine continues, the threat of another rise in energy and food commodities prices is still at hand.
The Labor Market
Liz Ann Sonders at Schwab notes to expect more deterioration in labor market indicators in 2023, including payrolls and the unemployment rate, signaled by the recent spike in layoff announcements.
Nonetheless, analysts at Vanguard believe that while companies have slowed hiring, difficulty in filling skilled positions indicates there may be fewer mass layoffs in 2023 than the Fed might prefer.
Earnings and Valuation
Excluding the Energy sector, the S&P 500 earnings growth is expected to be negative in Q4 of 2022, the third consecutive quarter with negative year-over-year earnings. According to Liz Ann Sonders, analysts are lowering price targets for S&P 500 members, with downgrades outpacing upgrades by most since the start of this year.
It is impossible to ignore some of the looming threats present today that could continue into the new year. According to Bloomberg, the two greatest threats to the U.S.’ national security and economy are China and Russia, specifically with the ongoing war.
China is currently dealing with intensified political and economic unrest. China’s zero-Covid policy has further exacerbated supply chain disruptions, and has led to a series of protests which, according to Bloomberg, lead to uncertainty across many segments of the economy – particularly those dependent upon Chinese labor.
Russia’s ongoing war in Ukraine remains a major threat to many countries’ security – particularly in Europe. Around the world, energy and food prices increased rapidly before tapering off a bit. So long as that war continues, it is likely energy and food prices will remain elevated and volatile.
Be fearful when others are greedy and to be greedy only when others are fearful.” – Warren Buffett
There are enough risks, threats, and negative headlines to question the sanity of any investor.
Nonetheless, for the prudent investor with ample cash reserves and an adequate time horizon, the present environment presents an opportunity for long-term investors to take advantage of discounted prices across the board.
According to Morningstar, two of the most undervalued sectors in the market right now are communication services and consumer cyclicals.
The overarching outlook amongst analysts at Charles Schwab, Goldman Sachs, and Vanguard is the stock market may experience reduced volatility in the latter part of 2023, with cooling inflation and significant decreases in supply-chain disruptions.
In the face of market uncertainty, our advice is to use the volatility to your advantage by investing with a long-term view in mind, maintaining ample cash reserves, and rebalancing your portfolio according to your specific financial goals and overall strategy.
For a more in-depth analysis, please visit the following:
–Charles Schwab’s Market Outlook
–Goldman Sachs’s Insights and Outlook
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.