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Our Top Market Takeaways for April 14, 2023

It ain’t 2022 anymore

Perhaps the clearest sign that markets have moved on from 2022 is that not even the latest Consumer Price Inflation data could cause much of a ruckus.

After the release suggested a relatively ho-hum increase in prices (0.4% for core, 0.1% for headline on the month), investors shifted focus to the upcoming earnings season where they hope to learn more about the state of bank deposits, consumer spending and technology turn-around efforts.

The returns we have seen stand in stark contrast to 2022’s risk-off environment. From their respective lows, Bitcoin has surged almost 100%, Chinese internet companies have gained over 70%, Mega Cap tech stocks are up nearly 50% and even the ARKK Innovation ETF, which shed two-thirds of its value in 2022, has bounced by 33%. The best stock in the S&P 500 this year (NVIDIA) is up over 80%. In 2022, it lost 50%.

European equities are close to all-time highs, and core bonds have provided a workmanlike 3.5% return. The U.S. dollar is close to its lowest levels in a year. 

The most-valuable-player in portfolios last year was short-term treasuries. This year, most major asset classes are outpacing t-bills. Energy and commodities, the other 2022 standouts, have also lagged.

We welcome the vibe shift in markets, but there is no shortage of debate about what the rest of the year has in store. In today’s note, we review the case that both bulls and bears make for the path forward and provide our take.

SPOTLIGHT: Bull vs. Bear

The U.S. economy: The bears have a lot of evidence they need to make their calls for a U.S. recession. Rate hikes have consequences after all. The failure of Silicon Valley and Signature banks may not have led to a crisis of confidence, but the problems for bank profitability and credit availability may just be getting started. Small businesses are already reporting that credit is harder to find, the office real estate sector will likely have a material distress cycle given higher interest and vacancy rates, and continuing jobless claims are starting to signal cracks in the labor market.

The chart describes the % of Federal Reserve Board senior officers saying that banks are tightening C&I loans to large firms.

The bulls still have a decent case to make. Wage inflation seems well on its way to normalization without any rise in the unemployment rate, which seems to settle one of the key macroeconomic debates of the last 18 months. Even though strains are just starting in the office sector, the residential housing market is showing tentative signs of turning a corner. Housing market sentiment and home sales are tentatively perking up.

Our take is that it still seems like a recession is more likely than not, but a softer landing is possible. We will be closely watching for signs that the credit crunch from March is having a sustained negative impact through the spring.

The global economy: The bears on the global economy seem to be worried about geopolitical risks, energy crises, an unpredictable war and unresolved trade issues between the U.S. and China. It makes sense to keep a keen focus on all of these unresolved issues that threaten economic growth and stability. In fact, our Chairman and CEO Jamie Dimon spent time discussing them in his latest letter to shareholders. The biggest risks facing the global economy outside the U.S. are probably not endemic to the business cycle, but are still very important to monitor.

The bulls seem to have the upper hand here. Global Purchasing Manager Indices, which offer a real time indication of business activity, are at their highest levels since last summer and have had a tremendous bounce since last fall. A weaker dollar helps grease the wheels of global trade, and China’s reopening continues to provide a boost. Louis Vuitton helped drive the French stock market to an all-time high this week after strong sales in China.

The chart describes Global PMI from January 2010 until March 2023.

Our take is that growth prospects outside the U.S. look better than they do inside the U.S. That means the dollar is likely to continue to weaken, and investors should look to European and Chinese stock markets which could continue to perform well.

The bond market: The bears on bonds have a simple case: The economy is still chugging along and inflation is still at ~5%. It doesn’t make much sense for yields to fall (and bond prices to rise) as long as growth remains resilient and inflation sticky.

The bulls say that markets only have ~80 bps of interest rate cuts priced in over the next twelve months. In the average recession back to the 1950s, the Fed has cut by an average of ~300 bps (excluding Volcker’s 1980 campaign). In a recession, Fed cuts will likely be deep, and price gains in core bonds could be steep.

The chart describes the change (bps) in effective fed funds rate 12 months following the start of recession.

Our take if our base case on the economy plays out, we could be in for much lower interest rates (and higher bond prices) over the next 12-18 months. However, for the tactical investor, there may be better entry points in the weeks ahead.

The stock market: The bears point to the ominous U.S. economic backdrop to justify their view that stocks should head lower. Valuations also seem to be embedding a high degree of confidence in a relatively benign earnings outcome. The forward P/E multiple of the S&P 500 is above 18x again, and the spread between what you can yield from earnings and what you can get from corporate bonds is the tightest of the last 10 years.

The bulls suggest that the earnings recession that we have been in is set to end after this quarter. After that, consensus expectations call for earnings growth to quickly bounce back to a low teens pace by the end of the year. Beyond the fundamentals, positioning seems short, which could set the market up for a squeeze higher if we have an upside surprise this earnings season.

Our take is that neither are right. Instead, we expect choppy, rangebound trading through the rest of the year. Certain sectors (healthcare, industrials, and reasonably priced tech) and sizes (mid-caps) may outperform, but at an index level, we are pretty close to where we think the market will likely end the year.

TAKEAWAYS: Back to reality

The hardest part of 2022 was that barely any investments worked.

What we have learned so far this year is that 2022’s environment of boiling inflation and aggressive interest rate hikes is in the rearview mirror.

The debate between bulls and bears will continue, but investors should take comfort in the idea that assets are doing what they need them to do to achieve long-term success. Equities drive long-term growth. Bonds provide stability and security. Alternatives allow for the potential to outperform public markets and access unique opportunities.

We can help address the investment challenges ahead while building portfolios that help you reach your financial goals.


All market and economic data as of April 13, 2023 and sourced from Bloomberg and FactSet unless otherwise stated.

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The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases.

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