Source: Zhitong Finance and Economics
Author: Zhuang Lijia
Markets are increasingly convinced that cooling inflation will soon end the Fed's cycle of aggressive interest rate hikes, but at the same time, high interest rates could tip the economy into recession and put pressure on US stocks hoping to recover after last year's heaviest blow since the 2008 financial crisis.
The pause in U. S. stocks at a strong start to 2023 highlights a major question that bothers most investors: when will it be safe to return to the stock market?
Markets are increasingly convinced that cooling inflation will soon end the Fed's cycle of aggressive interest rate hikes, but at the same time, high interest rates could tip the economy into recession and put pressure on US stocks hoping to recover after last year's heaviest blow since the 2008 financial crisis.
Ed Clissold, chief US strategist at Ned Davis Research, said: "the S & P 500 never bottomed out before the recession began, but it is not clear whether the US economy will really fall into recession." The company estimates that there is a 75% chance that the US economy will fall into recession in the first half of 2023. He added: "some indicators tell us that a soft landing is not impossible. However, all these cross-cutting trends do make it challenging for investors to build positions in the US stock market. "
As investors rely on economic data and historical trends for clues, these cross-trends will cause the stock market to fluctuate at the beginning of the year. Last week, the s & p 500 fell 0.7%, ending two consecutive weeks of gains.
Ed Clissold says the historical performance of different industries can provide guidance on the direction of investment in a downturn. Companies that tend to peak late in the economic cycle, such as material producers and industrial companies, usually perform strongly in the six months before the recession. The same is true of essential consumer goods and health care stocks. At the same time, stocks in interest-rate-sensitive industries such as finance, real estate and growth technology tend to lag behind during this period.
The problem is that the scale of the stock sell-off last year made it difficult to make historical comparisons. In fact, last year's biggest losers-such as interest rate-sensitive technology and communications services-have been one of the best performers so far this year, making investors wonder whether the worst of the bear market is over.
In the coming week$Microsoft(MSFT.US)$、$Tesla(TSLA.US)$和$IBM Corp(IBM.US)$The announced results will attract a lot of market attention, and they will affect the stock market more widely. In addition, the Commerce Department will release preliminary figures for fourth-quarter gross domestic product (GDP) on Thursday, which will also affect stock markets.
According to Mark Newton, head of technology strategy at Fundstrat Global Advisors, the S & P 500 could hit bottom in mid-October. He believes it is too early to abandon hard-hit technology stocks altogether.
"I am optimistic about the US stock market this year, but the biggest risk for the stock market is that the Fed may raise interest rates too much," Mark Newton said. He said he was watching whether the S & P 500 could hold its low near 3800 in December. The results of technology companies this week could be a huge catalyst. Other areas of the market are stabilising. But if technology stocks fall very badly, that's a problem and the market won't be able to rebound across the board. "
According to a media survey, respondents expect the US economy to contract in the second and third quarters of this year. While this is in line with the standard definition of recession, the data show that since 1979, the National Bureau of Economic Research, the official body that defines whether the US economy is in recession, did not announce that it was happening until an average of 234 days after the recession began.
By contrast, the stock market is more likely to be a leading indicator of when the recession begins and ends. According to data compiled since World War II by CFRA, a research firm, the stock market usually predicts the risk of a recession seven months before it begins and bottoms five months before it ends.
While the S & P 500 appears to have absorbed the impact of falling earnings, rising interest rates and continued economic uncertainty are likely to dampen stock market gains in 2023. The model shows that in a basic case, the S & P 500 will be around 3977 by the end of 2023, roughly the same as it closed on Friday. But in a bullish scenario, the index could reach 4896, up about 23% from Friday's close.
Kevin Rendino, chief executive of venture capital firm 180 Degree Capital, is betting that the US recession has begun. He has been snapping up small-cap stocks, especially technology and non-essential stocks that he believes are extremely undervalued. Historically, small-cap stocks were the first to hit bottom before the broader market rebounded higher. The Russell 2000 is up 6 per cent since January, outpacing the 3.5 per cent rise in the S & P 500 for large-cap stocks.
"while everyone is running away, I'm heading for small-cap stocks that have been hit hard," says Mr Kevin Rendino. "they will be the first to recover from the trough, as opposed to large-cap stocks. Investors expect the economy to fall into recession, but whether we fall into recession or not, we will not come to the end of the world."
Edit / Somer