This week the indices of the New York Stock Exchange experienced a wave of gains that made us remember the best times, it even seemed that they were celebrating something.
What they were “celebrating” was that the Fed Chairman, Jerome Powell, anticipated that by next December it is very probable that the body he presides over, the Fed, will slow down the rate of interest rate hikes.
The markets consider that, with this signalthe Fed will stop raising the rate by 75 basis pointsas it had done on the four previous occasions, now the consensus expects said increase to be 50 basis points.
However, the optimism does not seem to be widespread or long-term.
This same Thursday some experts anticipated a bad year 2023 for the stock markets, they even forecast falls of up to 12 percent in the coming months.
It’s too soon to claim victory
JP Morgan, Goldman Sachs, Deutsche Bank and Morgan Stanley coincide.
These great “sharks” of the markets consider that in the first half of 2023 the lows of this year will be seen again in the stock markets despite Powell’s words released on Wednesday afternoon and that they were enough for them, taking advantage of the fact that the New York stock markets were still trading, a rally would start.
A) Yes, the Nasdaq 100 advanced 4.4 percent, buoyed by gains like Meta’s 7.9 percent rise and all Big Techs above 4 percent.
The S&P 500 rose 3.09 percent.
However, analysts have warned and point out that: “it is too early to claim victory”
For example, JP Morgan issued a report on Thursday warning that 2023 will open with a strong downward spiral and that the market is overreacting to the good news.
“We do not expect this year’s constructive growth context to persist into 2023,” Dubravko Lakos-Bujas said.
According to the expert and his projections, the main index of the United States, the S&P 500, could register a collapse of up to 12 percent in the first half of the year; if carried out, this would take its level to the minimum recorded in 2022.
The cause of caution
The reason why analysts from such influential institutions in the markets are also linked to Jerome Powell’s warnings.
As we know, The US central bank is currently conducting an upward campaign of interest rates along with other banks around the world.with the objective of putting a brake on inflation, and eventually returning it to the predetermined targets.
This increase in interest rates is still a factor that works against the equity markets.
“Fundamentals are likely to deteriorate as financial conditions continue to supportive and monetary policy tightens further,” the JPMorgan expert said.
On the Fed’s eventual “turnaround,” Powell backed away from the hawks, saying that “it makes sense to slow the pace of rate hikes” in a speech at the Brookings Institution.
For the markets, it is inevitable that the next increase by the Fed will be 50 points in December, and no longer 75 base points after four increases in a row of such magnitude.
But, Powell also cautioned that the current inflation data does not give reason to be optimistic.
“It will take a lot more evidence to believe that inflation is coming down,” he said.
That’s why experts believe markets overreacted to Powell’s first statement, ignoring the implications of the overall tone of his speech.
other warnings
In this context, JP Morgan is not the only one warning of a difficult year for the markets in 2023, despite the fact that the Fed will reduce the pace of rate increases.
Mike Wilson, director of equities at Morgan Stanley in the United States, warned in statements to CNBC that at the beginning of 2023 there will be a 2-digit drop, which would take this indicator to levels of approximately 3,900 points.
“The bear market is not over,” Wilson warned.
“We will have significantly lower lows if our earnings forecast is correct,” he concludes.
“That’s where we really think there’s a significant downside. So while 3,900 sounds like a really boring six months, it won’t be, it’s going to be a wild ride.”
The above is due to Powell has made it clear that the guys could stay high for a while, and they don’t seem to listen to it.
For their part, Goldman Sachs analysts Christian Mueller-Glissmann and Cecilia Mariotti stated in a note for investors that the damage that a possible recession can unleash on Wall Street is being underestimated. “Equity risk premia look low given the heightened risk of recession and uncertainty about the growth/inflation mix.”
In the note they pointed out that the S&P 500 is trading 17.5 times its price/earnings ratio above the average of the last 20 years, equal to 16.7 percent, which suggests that the market may be overvaluing US equities.
As if that were not enough, at Deutsche Bank, they also believe that the threat persists. Deutsche Bank’s Binky Chadha told international financial media that he expects the S&P500 index to fall to 3,250 points, which is 19 percent below current levels.
This could happen in the third quarter of 2023, when a recession begins, according to the expert.
“Bad news is bad news, but investors still don’t understand it and that can be expensive,” Danske Bank analysts said for their part this Thursday in their morning commentary.
Similarly, other market participants warn of risks for 2023.
Some believe, for example, that “this is not the time to get too excited about Powell’s comments.”
The Fed Chairman has made it clear that rates could stay high for some timethis context of high rates is not the easiest to invest.
Everyone agrees that there is still a long way to go.
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