Rapid interest rate hikes by the US Federal Reserve pulled valuations down, and previously hyped tech stocks in particular slipped. Added to this was the escalation of the conflict over Ukraine with the invasion by Russia and the headwind for the global economy from China’s strict corona policy. If you believe experts, the price recovery should soon be over towards the end of 2022. They expect a weak start to the stock market year 2023 before the prospects brighten.
The Fed’s about-face – although looming as early as late 2021 – caught many investors off guard. It is reminiscent of the Fed of the 1980s, which, under Paul Volcker, had plunged the economy into a deep recession in the ultimately successful fight against excessive inflation.
Investors are currently worried that this development will be repeated around 40 years later, explains market strategist Michael Wilson from the US bank Morgan Stanley. At the same time, however, they also feared that the Fed would not put the brakes on interest rates hard enough and that stock valuations would come under similar pressure as in the 1970s. The decade was marked by high inflation and weak performance in the broader S&P 500 index in the first half.
These investor fears sent the S&P 500 down around 19 percent by just before Christmas in 2022, despite a recovery of a good 11 percent since mid-October. However, the index had risen significantly in the past three years – also thanks to the cheap money policy of the central banks – and had increased by a total of 90 percent. Tech stocks have had even more lift over the three years. The NASDAQ 100 was up more than 150 percent overall. Online stocks were in high demand, especially during the corona pandemic, regardless of whether the companies made money or not. The correction in 2022 was correspondingly sharp: the Nasdaq 100 has fallen by 31 percent so far. The leading US index Dow Jones Industrial held up better at minus 8 percent.
Barring a further escalation of the geopolitical problems, the focus is on the consequences of the interest rate hikes by the Fed in 2023. “The key question is whether there will be a real recession or all central bankers’ hopes of a ‘soft landing’, with inflation moving towards target levels without a significant fall in output and a significant pick-up of unemployment,” says chief economist Shamik Dhar of wealth manager BNY Mellon Investment Management.
However, persistently high inflation almost always leads to a recession, according to Dhar. The last time the US economy avoided an economic downturn with inflation as high as it is now was in the 1950s. Dhar therefore expects that a global recession is imminent in early 2023, “triggered by the rapid hike in US interest rates”.
The market strategists at the US bank JPMorgan are also pessimistic. Despite all the problems, economic fundamentals remained robust in 2022, but this is likely to change in 2023 as funding conditions tighten as Fed policy tightens. Against this background, Morgan Stanley expert Wilson explains that profit expectations for companies have only just begun to fall.
In this weaker economic environment, the Fed is likely to raise interest rates too much and send the stock markets plummeting, explain the JPMorgan experts. The S&P 500 will probably test its low for the year from 2022 again in the first half of 2023. He had achieved that in mid-October at just under 3500 points. Based on the current price level, that would be a minus of around ten percent.
According to JPMorgan, such a sell-off in combination with rising unemployment and gloomy corporate sentiment should then persuade the Fed to announce an end to interest rate hikes. That will initiate a recovery in the stock markets. The strategists see the S&P 500 at 4200 points at the end of 2023.
That makes them more optimistic than Morgan Stanley’s Michael Wilson. He also expects a weak start to the stock market year 2023 and a recovery towards the end of the year. Ultimately, he sees the S&P 500 at 3900 points, but only just above the current level. He also refers to the increasingly multipolar world with a number of countries claiming leadership. Due to increasing trade restrictions – such as the US tech export ban on China – the global supply chains have changed, and the costs for companies have increased structurally. In such a world, risk premia for stocks also rose, Wilson said. However, higher risk premiums mean lower prices under otherwise identical circumstances.
On average, the 23 market strategists from various banks surveyed by the Bloomberg news agency see the S&P 500 at 4078 points at the end of 2023.
NEW YORK (dpa-AFX)
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