New Year, New Market 🥂

Market Musings 1/17/2023

Quick thoughts on the markets and major portfolio news. Not on Ursa yet? Download Ursa from the App Store!

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We see 2023 playing out in 3 phases: cooling labor market, mid-year recession and then the recovery begins.

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Some New Year’s optimism with markets off to a strong start. S&P 500 up +4% YTD through Tuesday’s close. While we’re encouraged by the market’s regained confidence, we’re still a little skeptical it’s sustainable. We believe markets still need to come to terms with extended #RisingYields policy and enter a #Recession2023 before recovering. Thus, we see 2023 playing out in 3 phases: (1) cooling labor market, (2) mid-year recession and then (3) recovery begins.

2022 saw markets freak out with surging inflation peaking at 9.1% Y/Y in June as well as attempt to rally on CPI declines falling to 6.5% in December. While encouraging, this is still far from the Fed’s 2% target rate. It seems a majority of the recent decline is driven by stabilization of volatile energy pricing (like gas). However, wage growth continues to be strong with low unemployment. (Wage inflation tends to be more persistent.) We view strong, but cooling #LaborMarkets as the key to inflation reduction and likely to drive market volatility in the first half of the year.

Meanwhile, we believe markets continue to underestimate the Fed’s aggressive resolve to combat #InflationFears and expect #RisingYields to reverse upon any signs of improvement. The Fed obviously doesn’t want to hurt the economy and likely continues to slow rate hikes pausing in Q2. However, given its very public inflation miscalculation in 2021, we expect the Fed to sustain restrictive #RisingYields policy until they are absolutely positive inflation is tamed. We expect extended #RisingYields to drive more #CorporateBeltTightening, cooling #LaborMarkets and #ConsumerNoConfidence lower spend likely pushing US into a mild #Recession2023 mid-year.

As the Fed has warned in commentary, a recession may unfortunately be a necessary consequence to ensure inflation is controlled. We also believe a recession as necessary for markets to bottom. It’s like ripping off a bandaid－otherwise market volatility likely continues as investors forecast and speculate on every new data point. We expect markets to bottom mid-year as US enters a mild recession with potential for recovery in the second half with Fed contemplating reversing #RisingYields policy.

As noted above, we expect markets to remain volatile through mid-year. We recommend taking advantage of pullbacks to add to portfolios or just “set it and forget it” with dollar cost averaging.