Good evening,
Stocks continue to sink, dragging markets further down for a second consecutive weekly loss. The S&P 500 closed Friday down 19.68% on the year, despite a CPI print Tuesday showing that inflation is cooling. Core CPI, which excluded the more volatile food and energy components, rose +0.2% month-over-month, the smallest advance in 15 months (August 2021) and below the consensus of +0.3%.
But Wednesday, after the Federal Reserve raised its key interest rate for the seventh time this year, Chair Jerome Powell said more hikes are in store. “The inflation data in October and November show a welcome reduction,” he said, “but it will take substantially more evidence to give confidence in a sustained downward path.”
That was exacerbated Thursday when the November retail sales report was unexpectedly weak, prompting concern over the health of the U.S. consumer, which has been the driver of a better-than-expected economy in 2022. It has been a challenging year for most investors, marked by volatility. Consider:
- Thursday marked the tech-heavy Nasdaq’s 84th move of 2% or more in either direction this year
- That’s more than in 2008 and on pace for the most such moves since 2002
- After years of easy money and stimulus, volatility has gripped markets
- All told, the S&P is down 19.68% YTD, Nasdaq down 32.38%, and the Dow has fallen 10.02%. Since 1926, stocks and bonds have only had three years of combined negative returns: 1931, 1969 and 2022
Amid the volatility, market sell-off, and recessionary fears, Tom Lee, our co-founder and Head of Research, hosted his 2023 market outlook. Lee explained why his work shows the stock market will rally 18% in 2023 as the economy sticks a soft landing. His year-end forecast is 4,750, partly because “the U.S. economy is remarkably resilient in the face of rapid Fed hike cycles,” he said.
Added Lee: “The 2022 crisis is now shifted into opportunities, creating the highest possibilities for >10% returns since 2020.”
Lee said inflation is cooling rapidly and “falling like a rock,” meaning rate hikes should end early in 2023. He noted that it’s rare for the S&P 500 to post back-to-back negative return years. Since World War II, each instance of a negative gain for the S&P 500 in a calendar year was followed up by a positive annual return 86% of the time.
“The plurality of equity investors expect an inevitable recession as the Fed hikes until it breaks something,” Lee said. “But a ‘soft landing’ is the highest probability.”
If corporate earnings do not grow next year, as many analysts expect, that doesn’t mean stocks can’t go higher. Lee also cited many instances in which double-digit market gains occur in a year with zero or even negative EPS growth. Tailwinds include a weaker US dollar, supply chains easing, and China re-opening its economy. Lee expects S&P 500 earnings per share to “grow modestly” in 2023 to $250, from an estimated $220 in 2022. Asked later in the Q&A portion of the webinar, about potential risks or challenges to his constructive 2023 outlook, Lee said inflation staying high would hinder markets.
Lee also explained his top three sectors for 2023: Technology, Energy, and Industrials. Review why by reading his 2023 outlook slide deck and the webinar replay.
Elsewhere
In the UK, Chancellor of the Exchequer Jeremy Hunt warned on Monday that the British economy would “get worse before it gets better,” reporting that it shrank 0.3% between August and October. Hunt’s warning echoed the Bank of England’s, which had previously warned that a downturn could continue well into 1H2024. Meanwhile, the country is bracing for a series of labor stoppages. On a positive note, inflation fell in November to 10.7%, down from October’s 11.1%, which was a four-decade high.
China’s pivot from its zero-COVID policy continued with the shutdown of its mobile phone-based location tracking service, a little more than a month before the travel-intensive Chinese New Year holidays. Despite the lockdowns’ costs to the Chinese economy (and to a limited extent, the global economy), there are worries that with them lifted, a wave of new infections is coming that will hit a Chinese healthcare system that is still not prepared to deal with them.
The U.S. Department of Energy announced on Tuesday that scientists have, for the first time, successfully produced a nuclear fusion reaction with a net energy gain. Previous controlled nuclear fusion reactions had required an enormous energy input that made the energy generated not worth the effort. Scientists from Lawrence Livermore National Laboratory used 192 lasers to put in 2.05 megajoules of energy, generating 3.15 MJ of fusion energy output – more than 50% more energy than was put in. The next major challenge would be to sustain the reaction long enough to power electric grids.
And finally: With Tesla’s yearlong drop in share price, Elon Musk has ceased to be the world’s richest man, according to Forbes and Bloomberg. As of this week, that title belongs to Bernard Arnault, CEO of luxury-goods conglomerate LVMH.
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