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Despite the underlying volatility surrounding the stock market, equity indices moved higher in the last week that ended on December 2, 2022. A stronger-than-expected labor market again raised concerns over the possibility of further quantitative tightening measures by the Federal Reserve.
While the Dow Jones was rangebound, the S&P 500 and the Nasdaq Composite Index rose by 1.1% and 2.1%, respectively, last week. However, the 10-year yield touched a two-month low of 3.5% last Thursday as the yield curve inversion deepened. A leading indicator of an economic recession, the yield curve is inverted by 80 basis points which means the two-year yield is 80 basis points higher than the 10-year treasury yield.
Stock prices of energy companies were under pressure in the first half of the last week as West Texas Intermediate (WTI) prices fell to a year-to-date low of $73.50 but closed at $80 per barrel.
Data on several macroeconomic indicators, including the purchasing managing index, the producer price index, and the consumer sentiment index, will be published in the coming days, driving investor sentiment in the process. Companies including Costco (NASDAQ: COST), Broadcom (NASDAQ: AVGO), Oracle (NYSE: ORCL), and Lululemon Athletica (NASDAQ: LULU) will be publishing quarterly results too this week.
Recently, leading investment bank JPMorgan (NYSE: JPM) released its outlook for 2023 and key trends and drivers investors should watch out for. Let’s see what the financial giant expects to transpire in the global markets in the next 12 months.
Housing activity to remain under pressure
Mortgage rates and housing demand are closely related. A higher interest rate environment will result in lower demand for housing and weaker numbers for verticals such as construction, furniture, and durables.
However, just 5% of U.S. mortgages are on an adjustable basis, compared to 20% in 2007. As 30-year mortgage rates stood at 2.8% at the depths of the COVID-19 pandemic, refinancing activity gained pace across the board. So, disposable income should not be impacted by recent hikes.
Additionally, limited stock of housing for sale should prevent large house price declines in 2023.
What next for Europe?
Investors in the European markets might be closely watching the demand and supply of energy in the continent. Russia, which previously supplied 40% of Europe’s gas, stopped a bulk of these supplies in recent months.
At this point, Europe might avert an energy crisis as they undertook energy rationing measures resulting in full storage levels. But a colder winter might alter the scenario for the worse.
China and supply chain
While COVID-19-related restrictions have been withdrawn in most regions globally, China is still imposing lockdowns in several provinces. The manufacturing hub of the world, China’s zero-COVID-19 policy is unlikely to ease supply chain disruptions in the near term.
Inflation and interest rates
In case production activity gains momentum in China, inflation might ease in 2023. Slowing economic activity in the U.S. and lower-than-expected crude oil prices will also act as tailwinds for lower inflation in the near term. But the labor market needs to cool off for the central bank to even consider lowering interest rates.
Banks are well capitalized
The well-capitalized balance sheet of banks should prevent a credit crunch. Tighter regulations following the financial crisis of 2008 have ensured commercial banks are much better positioned to endure an economic downturn.
A modest recession
Due to the above-mentioned factors, developed economies are likely to experience a mild recession in 2023. However, equity valuations in emerging markets are looking quite attractive at current levels.
Bonds are attractive
During the elongated equity bull market in the past decade, interest rates were extremely unattractive, as 90% of global government bond rates yielded below 1%. Now, the reset in yields in 2022 has boosted the diversification potential of bonds.
JPMorgan emphasized, “The reset in fixed income this year has been brutal, but it was necessary. After the pain of 2022, the ability for investors to build diversified portfolios is now the strongest in over a decade. Fixed income deserves its place in the multi-asset toolkit once again.”