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Market Prediction for January 2023


The S&P 500 ended 2022 poorly, posting its poorest year-over-year performance since 2008. The benchmark index dropped more than 5% in December and ended 2022 with over 20% down.

Throughout 2022, continued selling was sparked by investor worries about rising interest rates, sluggish economic growth, and persistently high inflation. Particularly heavily impacted were cryptocurrency, growth stocks, and tech companies.

The rate of inflation appears to be finally declining as 2023 approaches. Analysts and economists worry that a recession may be on the horizon in the first half of the year since the Federal Reserve's fight against increasing prices is still far from complete.

Interest rates continue to rise.

the two biggest concerns on Wall Street in the first quarter of 2023 will probably still be inflation and interest rates.

The consumer price index (CPI), which peaked at 9.1% in June 2022, increased by 7.1% year over year in November 2022, down from 7.7% in October. In November, the personal consumption expenditures (PCE) price index rose 5.5% over the previous year, down from a 6.1% increase in October.

Core PCE, the Fed's preferred inflation indicator that excludes volatile food and energy costs, increased by 4.7% in November, which is still significantly higher than the Fed's long-term target of 2%.

The Federal Open Market Committee (FOMC) decided to increase its fed funds target rate by 50 basis points (bps) to a new range of between 4.25% and 4.5% in December, slowing down the pace of its interest rate increases. The rate increase in December comes after four consecutive 75 bps increases by the FOMC.

Sadly, according to CME Group, the bond market now estimates that there is an 86% possibility that the Fed will increase rates by at least another 50 basis points by March 2023.

Increased Risk of Recession

The economy will probably experience a challenging moment in the first several months of 2023. Although inflation seems to be on the down, analysts and economists are concerned that it may prove to be more persistent than the market anticipates.

The Fed has aggressively hiked rates up to this point without sending the economy into a recession. But according to recent assessments of economic data, there is now a far greater chance of a recession in the first half of 2023.

Existing house sales in the United States were down 7.7% month over month in November and are down 35.4% from a year ago. In December, the U.S. consumer sentiment index increased 5% every month, although it is still down 15% from a year ago.

Even the Fed has lowered its projections for 2023 GDP growth. In December, the FOMC revised its long-term economic estimates, cutting its projection for 2023 U.S. GDP growth from 1.2% to barely 0.5%. Comparing that to the 3.7% rate the Labor Department reported in December, the FOMC also increased its projection for the US unemployment rate in 2023 to 4.6%.

Up until now, the labor market has held up well. In November, the U.S. economy added 263,000 jobs, more than the 200,000 jobs predicted by economists.

Investors should anticipate a U.S. recession in the first half of 2023, according to economist Aditya Bhave of Bank of America, and the labor market will be the next domino to fall.

The labor market's material slowdown should be the recession's "tipping point," according to Bhave.

According to Bhave, the manufacturing sector is deteriorating and the U.S. housing industry is already in a recession. Additionally, he asserts that economic growth will be negatively impacted by the FOMC's rate increases in 2022.

According to Bhave, the impact of this year's Fed tightening on the economy and labor market "probably hasn't materialized yet."

Markets Will Be Monitoring Earnings in the Fourth Quarter

In the third quarter of 2022, S&P 500 firms recorded a 2.5% year-over-year earnings increase and 11% revenue growth.

Mid-January marks the start of the fourth quarter results season, and analysts anticipate a dramatic deceleration in growth from these levels. For S&P 500 firms, the fourth quarter is expected to see barely 4% revenue growth and a 2.8% year-over-year decline in earnings.

Analysts forecast 5.1% annual earnings growth for the S&P 500 in 2022; but, given the particular economic circumstances of this year, the headline figure may be misleading. Because of the imbalances in the world's energy markets that were made worse by Russia's invasion of Ukraine, energy prices and profits soared in 2022.

As a result, the energy sector of the S&P 500 is expected to have full-year profits growth of 151.7%. Without contributions from the energy industry, 2022 profits for the S&P 500 are projected to decline by 1.8%.

The chief investment officer of Independent Advisor Alliance, Chris Zaccarelli, claims that slowing consumer spending and economic growth is good for inflation but terrible for the stock market.

The market is currently "backed into a corner," according to Zaccarelli because higher spending and growth are indirectly bad for stocks (because they are likely to prompt an even more hawkish response from the Fed) but slower spending and growth are directly bad for stocks (because they imply lower corporate earnings).

When major bank companies Citigroup (C), J.P. Morgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC) begin the earnings season and release their quarterly reports on Jan. 13, investors will receive their initial insightful input on the fourth quarter.


January investment strategies

It was only the fifth occasion since 1957 that the S&P 500 fell more than 4% in a single month. Fortunately, a subpar December result doesn't often portend a dismal year after that. In contrast, the S&P 500 has averaged a gain of 20.5% over the subsequent 12 months the previous four times it has seen a December fall of more than 4%.

By decreasing their exposure to stocks and boosting their cash holdings, investors who are worried about the possibility of a recession can benefit from higher interest rates. In early 2023, interest rates on the best high-yield savings accounts offered by banks that are covered by the Federal Deposit Insurance Corporation (FDIC) are projected to rise above the current rate of more than 4%.

Despite his continued optimism for stocks, Zaccarelli advises investors to proceed cautiously in the market right now.

Since a recession currently seems inevitable, Zaccarelli says, "we continue to remain invested since the market can turn at any time—especially with sentiment so negative." However, he adds, "we are positioned more conservatively within our equities and fixed-income assets."

In the past, value equities have performed better than growth stocks when interest rates are high, and 2022 was no exception. Compared to the Vanguard Value ETF (VUG), the Vanguard Growth ETF (VTG) fell 33.9% in 2022.

Analysts also believe that some market sectors are more defensive than others since they typically generate earnings that are resistant to the economy's cyclical downturns. Generally speaking, lower-risk, defensive sectors include the healthcare, utilities, and consumer staples industries.

Investors shouldn't jump to the conclusion that the market's inflation problems are at their worst, according to Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management.

When the weather appears quiet, you might mistakenly believe that the storm has passed, but Landsberg warns that this is only the hurricane's eye and that the storm's tail is still to come.

Landsberg Bennett advises investors to exercise patience and concentrate on holding defensive, high-quality equities to weather the storm for the time being.

According to Landsberg, "as we move into 2023, we believe it's important for investors to sell loss-making and high-multiple stocks, as these types of stocks won't perform well during a recession, and having extra cash on the sidelines is going to be crucial as we head into what will probably be a disappointing earnings season."

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