Will 2023 be another terrible year for investors?

Ahafter the nightmare In 2022, shell-shocked investors have losses to recoup, There is much to ponder. There are allocations to asset classes, industries to support or avoid, and all the economic variables to predict under the sun. Professional money managers have the added headache of figuring out how to stop nervous customers from racing for an exit. But one question dominates the rest, the impossible question that looms over every crash. Is the worst over?

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Economically, there is a clear answer. This year will be tough. Kristalina Georgieva, imfwarned on Jan. 1 that a third of the global economy is likely to slip into a recession by 2023. A recession has probably already begun in the eurozone and the UK. Economists conducted by the University of Chicago In a recent poll of financial times85% thought America would follow before the end of the year.

This does not guarantee another slaughter. In theory, markets were prescient, and recession fears gripped the world for much of 2022. Such a widely held consensus should be incorporated into today’s prices. In fact, analysts at JP Morgan Asset Management have used the strength of the consensus that there will be a recession, claiming stocks will actually be higher in 2023 than they were at the beginning. They are not alone in their optimism. Researchers at Goldman Sachs believe stocks will fall in the short term but recover by the end of the year. Deutsche Bank bull market s&p The 500 Index of America’s Largest Companies will end the year 17% higher than it is today.

It would be an anomalous year if this year were to result in big losses for both stocks and bonds as 2022 did. Stock prices usually go up. Two consecutive years of decline are rare.of specification The 500 last did so 20 years ago when the dotcom bubble burst. Last year’s bond crash was the fastest Fed rate hike since the 1980s, and a repeat is unlikely.

Yet there is reason to believe that more pain lies ahead. First, equities are still expensive by historical standards compared to their underlying earnings. Despite last year’s sharp sell-off, price-to-earnings ratios for “growth stocks” of companies with big future earnings promises are only down to 2019 levels. , the level reached after a decade-long bull market. Certainly, “value” stocks, i.e. stocks with a low price relative to the company’s book assets, look more attractive. But once the recession sets in, both types are vulnerable to earnings downgrades, most of which have yet to materialize.

In addition, today’s valuation was achieved at an extraordinary time when central banks have pumped unlimited liquidity into the market through quantitative easing (e). By buying government bonds in the newly created currency, the Fed and others lowered yields, encouraging investors to seek returns in riskier assets such as stocks.now these e The program is kicking backwards. One result is that governments will become more dependent than ever on private investors to hold onto their debt. From 2022, he said that in the 2023 fiscal year, the U.S. Treasury Department could need to borrow from investors nearly twice as much as it did in each of the two years preceding the covid-19 pandemic, and his That could be four times his five-year average. Even if central banks do not raise short-term interest rates, oversupply could drive bond prices down and yields higher. So, just like in 2022, equities look unattractive by comparison.

A final reason for pessimism is the divergence between economists and investors. The idiot is betting on a recession, but many speculators still hope he can avoid a recession.The market expects the Fed’s benchmark interest rate to peak below 5% in the first half of this year before falling. I expect. Central bank governors disagree. They predict that interest rates will hit him above 5% at the end of the year.

Investors are therefore betting that inflation will fall to target sooner than the Fed expects, or that the Fed won’t have the necessary tormenting heart to bring it down. Of course, they can be proven correct. But while the market has spent much of 2022 underestimating his Fed hawkishness, Fed President Jerome Powell is meeting one meeting after another. reversed its position. If this pattern repeats, 2023 will be another dismal year for investors.

Read more from financial markets columnist Buttonwood:
Indian stock market is soaring.They also have serious shortcomings (December 20th)
Every country is now an emerging market for fixed income investors (December 8)
Could Private Equity Avoid an Asset Price Crash? (December 1st)

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https://www.economist.com/finance-and-economics/2023/01/05/will-investors-have-another-awful-year-in-2023 Will 2023 be another terrible year for investors?

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