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We hosted our 2023 Outlook webinar yesterday (see links below) and a replay is available. The bottom line is we see the highest probability for double-digit gains since 2020. This call is fundamental (falling inflation) and Fed-based (Fed gets dovish).

Video Replay

MP3 Replay

Our latest “Inflation Dashboard” has been updated and is attached.

The bond market called Fed right in 2022 and now says Fed will be dovish in 2023… even if Fed doesn’t know it yet
James Carville once famously said in the next life, he wants to be reborn as the bond market (because it scares everyone). And this year, the bond market again proved its storied ability to see the future path of the economy, well before equity markets and well before the Fed.

Take a look at the Fed’s forecast for Fed funds from its December 2021 SEP (Summary Economic Projections):

FOMC anticipated YE 2022 Fed Funds of 0.9%, or 80bp of hikes in 2022

But by January 2022, the 2-yr yield (a proxy for where markets see Fed funds heading) was already at 0.90%.

2-yr screamed Fed was behind the curve by January 2022

Bond market anticipated Fed would need to drastically step up pace of hikes to +75bp by June 9th

And by early June, the 2-yr said Fed needed to step up the pace of hikes:

notice the spread 2Y less FF jumped on June 9th
this is right before Fed stepped up hikes to +75bp
Nick Timiraos of WSJ wrote his +75bp article on June 12th, 3 days after the bond market priced in +75bp

December 2022 FOMC Fed sees FF at 5.1% by YE 2023…

The latest FOMC dot plot (12/14/2022) sees Fed Funds at 5.1% by YE 2023.

Current Fed Funds is 4.375%
This implies about +72bp of hikes in 2023, or 3 hikes

2-year says Fed will cut rates in 2023

As we enter 2023, the 2-yr is saying Fed will make a dovish turn.

2-yr is 4.2%
BELOW current Fed funds of 4.375%
Well BELOW FOMC dot plot of 5.1%
In short, the bond market is more dovish than the Fed

In 2022, the bond market called the Fed actions well ahead of the Fed. And if this carries into 2023, the bond market says the Fed will soon turn dovish. That is good news for equities.

JOBS: Latest Linkup forecasts a 4% drop in job openings per JOLTS

It will be important for the labor market to soften and that is what is visible. The latest LinkUp November JOLTS forecast was published yesterday:

LinkUp sees a 4.1% decline in JOLTS for Nov (published early Jan)
This takes total job openings BELOW 10 million to 9.9 million
The lowest since early 2021
That is a material weakening in job openings

And as the composition chart shows, is because of a sizable drop in new postings:

the number of new postings is the lowest since 2021
this is an unwind of 2 years of job markets
thus, it looks like wage growth should slow in 2023
this would likely further catalyze the Fed to be more dovish

STRATEGY: Despite selling on hawkish ECB today (among other factors), the tailwinds from Fed are building into 2023

Bottom line, while equity markets are soft today on the heels of hawkish ECB and somewhat disappointing regional PMIs (mixed), the key is the trajectory of inflation which is softening:

equities are up +25% since end of 2019
EPS is up +35%
earnings have exceeded price appreciation over past 3 years
and as we highlighted in our 2023 Outlook equities gained 13% during the Volcker years
and during the Stagflation period 1978-1982, only posted 1 negative year
investors are arguably exiting 2022 too pessimistic

Notice how equities posted fairly solid gains during the Volcker era:

only 1981 was a negative return year
stocks rarely post two consecutive annual declines
thus, we see 2023 as setting up to be positive

37 GRANNY SHOTS: Updated list is below

The revised 37 Granny shots are shown below. The list is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear in at least two portfolios:

$AAPL in 4 of 6 portfolios
$GOOGL $MSFT in 3 of 6 portfolios
$AMZN $META in at least 2
This reinforces our favorable view of FANG in 2H2022

37 Granny Shot Ideas:

Communication Services: $GOOGL, $META

Consumer Discretionary: $AMZN, $AZO, $GPC, $GRMN, $ORLY, $TSLA

Consumer Staples: $BF/B, $MNST, $PG, $PM

Energy: $CVX, $DVN, $EOG, $PSX, $XOM

Financials: $ALL, $AXP

Health Care: $AMGN, $HUM, $UNH

Information Technology: $AAPL, $AMD, $AVGO, $CSCO, $KLAC, $MSFT, $NVDA, $PYPL, $QCOM

Materials: $CF, $FCX, $LIN

Real Estate: $AMT, $CCI, $EXR