The Ode to 2022, Our Glee of it Ending, but Be Aware of all the Negative Signs 2023 May Be Sending...
The Market's 2023 outlook - brought forth in rhythm and rhyme.
***As an admiration for the poem “The Night Before Christmas” by Clement Clarke Moore, I took a stab at a weekly write-up using a rhyme scheme. I hope you enjoy this as much as I did putting it together. ***
Before we begin, I just wanted to say Happy New Year to you all and thank you from the bottom of my heart for taking the time out of your busy day to read my posts. I am always looking to improve so if there are any topics or ideas you would like to see in these posts, please let me know.
It was the year of inflation….
And worker shortages galore….
The year Putin Invaded…
And got the world caught up in a war….
It’s the year your investments went south….
At the same time, the bills came due,
It was the year the party ended,
Which brought on the hangover - I mean the good old wine flu…
It was the year we want to forget, I think you would agree,
So join me now in our outlook for 2023!!!!
(Click HERE to see my 2022 recap and how we got here)
The Ode to 2023
2023 feels like the inevitable Monday after a long, hard, exciting weekend.
When all the fun things you did the previous few nights quickly catch up to you as they come to an end.
It started with Bitcoin, the new way to invest,
but quickly spread to stocks like Tesla,
and ARK Innova, which is a test for Cathie Woods investing strategy mess.
But the weakness did not stop with just the speculative asset class,
it even nocked large stocks like Facebook, I mean META, on its ass.
But with all the ugliness that came in stocks,
it was bonds that took the cake, for sinking like rocks.
Bonds facing one of the worst years on record in 2022
This all started with the elephant in the room.
As inflation moved too high, central bankers paint a picture of doom.
So with a wave of a wand, and a series of hikes,
Central bankers around the world are ending the boom,
with interest rate spikes.
The hangover is well-known by many economists who are screaming yikes,
It’s how fast a recession will come, as money in the system goes on strike.
When looking at recession indicators, you can clearly see,
the Fed is sending us into a recession to cut all our spending sprees.
While 2022 was the year of inflation,
2023 will be the year when Wall Streets’ pain spreads to the nation.
While 2022 was a terrible year all around,
this does not mean 2023 will not continue the fear to abound.
2022 was the year of the multiple contraction and interest rate hikes,
Look at the Blue line all the way to the right. 2022 is all multiple contractions, and 2023 will be earnings contraction.
Using history as our guide, the market multiple was too high versus inflation levels.
Fastest pace of Fed rate tightening we have seen.
2023 will be the year of earnings declines, and many consumer dislikes.
If we indeed fall into a recession in 2023, earning estimates will move much lower. I expect this to hit later in 2023 and into 2024.
Consumers are racking up credit card balances at record levels.
And these moves up in credit use (left chart) is at the same time banks are tightening lending standards as they are now starting to worry about defaults (right chart)
All because pay increases are not keeping pace with inflation. Real income (the money you make minus inflation increase) is at or near an all-time low.
The chart above left shows savings quickly diminishing. If you as a consumer have not used your savings this year, we would have very ugly consumer numbers (IE deep recession).
Consumer pain is usually seen first in things like auto loans and auto repos. Past few months this data is not looking good.
So with this quick outlook and viewpoint in mind,
I will give you a few predictions on what I think the New Year will find.
2023 Outlook
As the new year comes through the door,
Inflation will subside and make interest rate hikes no more.
Inflation will move lower as we progress through 2023. The key question is where does it stop? I really doubt we get back to the 2% level where the Fed Target is, which means rates will not be cut anytime soon.
This does not mean we are in the clear,
as the impact of these rate hikes on your daily life should be feared.
“However much the latest FOMC statement may profess to take into account “the lags with which monetary policy affects economic activity and inflation”, they will not see the effect on inflation of even the first-rate hikes until March 2024 – never mind the latest 75bp.”
Matt King at Citi
It will start with a housing market that is coming to a crawl,
As buyers and sellers cannot agree on prices, which will make the market stall.
But housing is not the end of this impact, please don’t groan,
You will also feel it as well in your next auto loan.
As someone who has a 2.5% auto loan rate today,
I could not imagine paying the average auto loan of over 12% as Mississippi's current averages this day.
The map above is an average auto loan on used car loans as of October 2022. The huge impact you will feel on your next car purchase.
Nearly every form of debt you are currently handling,
will see the rate you pay to go up on all balances that are outstanding.
This impact will make the economy slow,
as our bills will go up on the amount that we owe.
This impact is now just coming to your door,
and it will be felt well into 2024.
I fear a long and drawn-out adaptation as a nation,
Which will probably increase the chatter of us entering stagflation.
Right now the Fed’s goal is to get real rates much higher,
Real rates = current interest rate - inflation rate. Inflation does not end until we get real rates much higher.
as this is the only way they can be viewed as real inflation fighters.
This will make financial conditions much tighter,
All this rhyming is giving me a headache as a writer :)
I am afraid we will need to see more fear,
and see something break before we will be in the clear.
But it should not be all doom and gloom,
as we are finally out of the zero interest rate tomb.
When looking at investments as a portfolio shield,
bonds look attractive as they finally have a yield.
The two-year risk-free treasury is now yielding 4.31%!!!
The current rate on the BofA High Yield Index is currently 8.89%!!!
While bonds offer a great risk-adjusted return,
If the dollar declines there are other places you can earn.
In 2022 the US dollar made a multi-year high,
which made it hard to own certain assets as a buy.
But if the dollar weakens as the Fed stops the hikes,
There are other assets we would start to like.
The first would be hard assets, think oil, gold, silver,
and even Emerging Market equities, which just made me quiver.
China is reopening and facing some pain.
But once we get past the COVID shock and see a dollar weaker, we may see some gains.
I feel we will see a big rally in US equities on the back of inflation moving lower,
but this will be met with selling as corporate earnings and the consumer become slower.
As we mentioned above, we think earnings will falter,
as companies cut back on costs, and the firing of people will be their default.
The real key to strength will be on the revenue line,
but just like in the 1970s, real revenue growth is not fine.
Many have said if we face any trouble later in the year,
the fed will again cut rates to subside the fear.
I feel this viewpoint is a bit convoluted,
As the 1970’s playbook is so well-suited.
You see, back in the day,
the Fed tried to cut rates on any sign of inflation abating.
As a result of this action that they looked to play,
we faced a series of inflation spikes throughout the decade.
So we know to get inflation down,
we need to head straight to recession town.
So if you think at the first sign of a recession and lower inflation we will get a rate cut coming,
clearly, you have not studied the history of the Burns Fed's shortcomings.
So to wrap this up and give an outline to you,
I think our problems will last longer than the average view.
I think we face a recession that will impact the consumer,
but the market may rally on rate cut rumors.
History tells us after such an ugly year,
we should get something to potentially cheer.
At the end of the day, this is all just a guess,
but there is one thing for sure I would like to stress.
History has taught us to not fight the Fed,
so as long as they are tightening, forget everything I said.
It’s hard to make money when the keeper is trying to make you feel poorer,
so until the Fed is done, we are still in this horror.
So welcome to 2023, I hope you raise your glass,
As we all know, invest for the long-term as all this soon will pass.
As this is the last write-up of the year,
I want to thank you from the bottom of my heart, I hope that is crystal clear.
HEART TO TOES THANK YOU POEM:
From the bottom of my heart
To the tip of my toes,
You are the best.
And that –
Everyone knows.
I thank you. I thank you.
You do have the touch.
You’ve made me so happy.
I thank you
So much.
by Denise Rodgers
Happy New Year to you all!!!
I hope I can add more value to you through my writings in 2023!!!
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