Liz Looks at: Kicking off 2023

By: Liz Young · January 05, 2023 · Reading Time: 5 minutes

Start Me Up

Well, we certainly had ourselves a scary little Christmas, with the S&P ending down 6% for December, after the much hoped for year-end rally never materialized. But now we’re off to the races in 2023 and investors are collectively holding their breath, and rightfully so, since 2022 included some heinous outflows from major asset classes. Bonds in particular saw outflows of $375 billion, the largest amount ever and the first year of outflows since 2013.

As we review and revisit all of the outlooks for 2023, I propose that we not look at the year in terms of the first half versus second half, but rather start out just taking it one month or one quarter at a time. That may be counter-intuitive for long-term investors and the typical tone to my commentary, but I think it’s safe to say that investors’ emotions have been running high for over a year and that naturally makes us hyper-vigilant and more short-term oriented.

Under Jay’s Thumb

Since the next Fed statement isn’t until Feb 1, at least January will be free from the anticipation and subsequent reaction to every word that comes out of Jay Powell’s mouth. But make no mistake, markets are and will continue to be, under Jay’s thumb.

And so will technology stocks until there’s some shift in the wind. With the five largest components of the S&P still making up nearly 20% of the index and including Apple, Microsoft, Google, and Amazon, big tech names continue to dominate the conversation and have become a meaningful source of polarizing opinions.

The temptation to draw parallels to prior rate hiking cycles, prior recessions, or prior inflation regimes is strong. But in a time when we have a Fed balance sheet larger than ever before, and an FOMC committed to not repeating previous mistakes, those historical comparisons are likely less predictive.

Despite January’s lack of Fed events, the first quarter of this year will have plenty. Current expectations include a 25-basis-point hike in February and another 25 in March. If we make it through both of those, I’m not expecting there to be further hikes, which means we would know by the end of the first quarter if the Fed is done raising rates.

But that’s not victory. It just means we move onto the next leg of the journey and try to decipher how long rates will stay that high and continue to pressure financial assets.

Can’t Always Get What We Want

I want inflation to come down without having to reduce consumer spending, I want people to keep their well-paying jobs and enjoy wage inflation without pressuring corporate profits, and I want the yield curve to un-invert while stocks rise and erase our losses from 2022.

And I say to myself, “Fat chance, Liz.”

But as the song goes, “…if you try sometimes you just might find, you get what you need.” What we need is to get closer to finding balance in prices. It’s been messy already, and it’s likely to stay messy and hurt the economy more before it’s done. I’m talking particularly about the labor market and home prices, and I expect the December data to start showing this decline more convincingly.

My expectations for market action in January are admittedly not rosy. But if we start to see serious declines in inflation data and confirmation from other parts of the economy that the imbalances are slowly working their way out…I’ll find some reasons to smell the roses.


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