Category: Markets

US equities face much sharper declines than many pessimists expect with the specter of recession likely to compound their biggest annual slump since the global financial crisis, according to Morgan Stanley strategists.

Michael Wilson — long one of the most vocal bears on US stocks — said while investors are generally pessimistic about the outlook for economic growth, corporate profit estimates are still too high and the equity risk premium is at its lowest since the run-up to 2008. That suggests the S&P 500 could fall much lower than the 3,500 to 3,600 points the market is currently estimating in the event of a mild recession, he said.

“The consensus could be right directionally, but wrong in terms of magnitude,” Wilson said, warning that the benchmark could bottom around 3,000 points — about 22% below current levels.

The strategist — ranked No. 1 in last year’s Institutional Investor survey — isn’t alone in his view that earnings expectations are too optimistic. His counterparts at Goldman Sachs Group Inc. expect pressure on profit margins, changes to US corporate tax policies and the likelihood of recession to overshadow the positive impact from China’s economic reopening.

One of the factors driving Wilson’s bearish view is the impact of peaking inflation. US stocks rallied last week amid signs that a modest ebbing in price pressures could give the Federal Reserve room to potentially slow its interest-rate hikes. Wilson, however, warned while a peak in inflation would support bond markets, “it’s also very negative for profitability.” He still expects margins to continue to disappoint through 2023.

Deutsche Bank Group AG strategists led by Binky Chadha also expect US earnings to decline in 2023. Still, they said stocks could rally through the fourth-quarter reporting season, supported by a year-end selloff and low investor positioning.

That view is at odds with findings of the latest MLIV Pulse survey, which showed market participants are bracing for a gloomy season to push the S&P 500 lower over the next few weeks. Earnings start in earnest on Friday with reports from the big banks including JPMorgan Chase & Co. and Citigroup Inc.

Source: bloomberg.com

The S&P 500 closed Friday at 3,839.50, down 19.4% for the year. This makes 2022 the worst year for the S&P since 2008 and the fourth-worst year since the index’s launch 1957.

While it may be the case that the stock market usually goes up, 2022 was a reminder it doesn’t always go up. This is just part of the deal when it comes to successful long-term investing. The road to stock market riches comes with lots of ups and downs.

According to data compiled by Carson Group’s Ryan Detrick, the S&P 500 has had a positive year 71% of the time. It’s an incredible track record, but it isn’t perfect.

If history is a guide, then the odds favor positive returns in 2023. According to Detrick’s data, the S&P follows a negative year with a positive year 80% of the time with an average gain of 15%.

Again, the track record isn’t perfect. While it’s unusual for the S&P to see two consecutive years of negative returns, it’s not unprecedented. It happened after 1973 and 2000, and the subsequent year’s returns actually got worse.

TKer’s best insights about the stock market 📈

• 10 truths about the stock market 📈The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
• Stomach-churning stock market sell-offs are normal🎢 Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
• Wall Street’s 2023 outlook for stocks 🔭 I wouldn’t bet everything on a one-year prediction.Keep in mind that recent stock market performance won’t tell you what’ll happen in the coming months. Knowing where earnings are headed next year won’t necessarily tell you where stocks are headed. And while we’re on the subject of prices and earnings, the price/earnings ratio won’t tell you what’s coming next year, either. However, we do know that the stock market usually goes up in most years, and the long game is undefeated. And when you’re investing in stocks, time is a valuable edge.
• How stocks performed when the yield curve inverted ⚠️ There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
• How the stock market performed around recessions 📉📈 Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
• In the stock market, time pays ⏳ Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
• 700+ reasons why S&P 500 index investing isn’t very ‘passive’💡 Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks. From January 1995 through April 2022, 728 tickers have been added to the S&P 500, while 724 have been removed.
• The key driver of stock prices: Earnings💰 For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
  When the Fed-sponsored market beatings could end 📈 At some point in the future, we’ll learn a new bull market in stocks has begun. Before we can get there, the Federal Reserve will likely have to take its foot off the neck of financial markets. If history is a guide, then the market should bottom weeks or months before we get that signal from the Fed.
• What a strong dollar means for stocks👑 While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
• Economy ≠ Stock Market 🤷‍♂️ The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
• Stanley Druckenmiller’s No. 1 piece of advice for novice investors 🧐 …you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.
• Peter Lynch made a remarkably prescient market observation in 1994 🎯 Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.
• Warren Buffett’s ‘fourth law of motion’ 📉 Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
• ‘Past performance is no guarantee of future results,’ charted 📊 S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. According to their research, 29% of 791 large-cap equity funds that beat the S&P 500 in 2019. Of those funds, 75% beat the benchmark again in 2020. But only 9.1%, or 21 funds, were able to extend that outperformance streak into 2021.
• One stat shows how hard it is to pick market-beating stocks 🎲 Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 22% of the stocks in the S&P 500 outperformed the index itself from 2000 to 2020. Over that period, the S&P 500 gained 322%, while the median stock rose by just 63%.

Data via S&P Dow Jones Indices:

Source: finance.yahoo.com

Crypto holders had a rough ride in 2022.

At the start of the year, the collective market cap of cryptocurrencies worldwide stood at $2.2 trillion. As the year ends, that figures stands at just below $800 billion.

The industry’s euphoric highs of last year descended into a bear market of epic proportions, leaving many of the industry’s major players in collapse. Or worse.

The plunge in crypto prices started with central banks cutting the cord on easy money policies, which dragged down risky assets first, and the problems multiplied from there — accounts were frozen, bankruptcies declared, frauds uncovered.

In 2021, cryptocurrencies powering Layer-1 tokens such as ethereum (ETH-USD), Avalanche (AVAX-USD), Solana (SOL-USD), Polygon (MATIC-USD), and Cosmos (ATOM-USD) stole the show.

This year that battle for outlandish returns whittled down to a competition for least bad losses. And the results are more of a grab bag of cryptocurrencies rather than reflecting a clear theme on the industry’s progress.

Ethereum (-68% YTD)

After outperforming bitcoin by 355% last year, ether (ETH-USD) came in as the 10th-best performing cryptocurrency in 2022, falling just less than 70% this year.

Despite its performance, the second-largest cryptocurrency pulled off the Merge upgrade in mid-September, transitioning to proof-of-stake from proof-of-work, which proved to be one of the industry’s few success stories in 2022.

The technological feat has also freed Ethereum core developers to dive into other initiatives meant to improve the protocol’s transaction scaling, privacy, and use as a financial layer.

Part decentralized banking layer and part tech platform, Ethereum still doesn’t offer the crucial feature of allowing investors to withdraw their staked deposits. As Galaxy Digital research associate Christine Kim has noted, Ethereum’s core developer team has said the protocol’s Shanghai upgrade, which will include staked ETH withdrawals, could be activated as early as March 2023.

The Merge made the Ethereum blockchain 99.95% more energy efficient and was a deflationary force on ether supply.

Bitcoin (-65% YTD)

The world’s biggest cryptocurrency fared better than some smaller counterparts, but was not immune from 2022’s market washout.

Bitcoin is down 76% from its November 2021 peak at $68,789 and currently trades near $16,500.

In April, when bitcoin traded at $41,000, Alex Thorn, head of research with Galaxy Digital, said he doesn’t think the market has changed its view on bitcoin (BTC-USD), which it sees as both “an option on a future where the cryptocurrency is treated like digital gold” and a “protest of the lack of credibility of central banking.”

Between its November 2021 peak and December 12, bitcoin investors have given back $213 billion in realized losses according to data collected by crypto analytics platform, Glassnode.

“In terms of an outlook for next year, it’s really hard to be bullish on bitcoin and crypto in general given the tenuousness of macro and monetary conditions,” Thorn added.

Dogecoin (-60% YTD)

Widely held by retail investors, the original “meme” coin followed most of the crypto market in a massive sell-off starting in the second quarter.

Still, Dogecoin fared better than many tokens in 2022.

However, unlike most major cryptocurrencies, Dogecoin (DOGE-USD) had already sold off from 64% from its May 2021 peak — reached when Elon Musk appeared on Saturday Night Live — to the end of 2021.

“People know that it’s a joke. They like the joke,” Thorn told.

Thorn’s team published a paper on DOGE at its 2021 peak, noting “a general lack of development effort,” and “no serious long-term narrative or use case.”

Still, Thorn’s team found Dogecoin “had a fair launch,” meaning it didn’t include a presale or venture capital fundraise, which can be red flags when insiders carry large stakes that put outside buyers at a disadvantage.

The cryptocurrency has outperformed most others through the fourth quarter, due in large part to Elon Musk’s deal to buy Twitter, with users speculating this purchase could have some benefits for Doge holders.

Ethereum Classic (-54% YTD)

Coming in with a 53% loss, Ethereum Classic (ETC-USD) also benefited from speculation leading up to the Merge.

While its use and developer community is a fraction of the size of Ethereum’s, Thomas Dunleavy, a senior market researcher for Messari, pointed out the small-cap token has routinely seen value appreciation ahead of Ethereum-related software upgrades.

As Ethereum’s Merge was reaching completion, skeptical investors viewed Ethereum Classic and other offshoots of the second largest cryptocurrency as a hedge or insurance policy in case the upgrade failed.

BNB (-53% YTD) and OKB (-17% YTD)

Exchange-associated tokens such as OKB (OKB-USD) and BNB (BNB-USD) both performed better than most cryptocurrencies this year.

BNB is the token associated with Binance, while OKB is the token for the OKX ecosystem.

However, as recent developments through the FTX crisis and the corresponding collapse in its exchange token FTT have shown, the value of these tokens can change quickly based on the management of their corresponding crypto exchange.

Exchange tokens can give holders specific benefits like lower trading fees and the ability to vote on exchange decisions. Exchange tokens are also almost always linked to a crypto exchange’s success as a business, serving in part like corporate equity.

Monero (-42% YTD)

As in past years, the tension between transparency and privacy for cryptocurrency transactions returned as an undercurrent through 2022.

Unlike Bitcoin and Ethereum, Monero (XMR-USD) gives users less censorable transaction privacy by default without requiring the use of crypto mixing services.

Monero’s more modest sell-off this year suggests its feature as a privacy coin offered users more utility than the majority of cryptocurrencies in the market.

Tron (-28% YTD)

TRX (TRX-USD), the native cryptocurrency of the Tron blockchain, came out ahead of most other cryptocurrencies, losing less than a third of its value this year.

The token’s value, according to Messari’s Thomas Dunleavy, has mainly benefited from the Tron ecosystem’s growing amount of stablecoin volume. TRX’s supply burn is based on its level of transaction volume.

As 2021 superstar LUNA imploded alongside its associated stablecoin TerraUSD (UST) in May, the Tron ecosystem launched its own decentralized stablecoin (USDD-USD). The Tron ecosystem’s network activity jumped 47% in the second quarter according to Messari.

Source: finance.yahoo.com

For much of the global economy, 2023 is going to be a tough year as the main engines of global growth – the United States, Europe and China – all experience weakening activity, the head of the International Monetary Fund said on Sunday.

The new year is going to be “tougher than the year we leave behind,” IMF Managing Director Kristalina Georgieva said on the CBS Sunday morning news program “Face the Nation.”

“Why? Because the three big economies – the U.S., EU and China – are all slowing down simultaneously,” she said.

In October, the IMF cut its outlook for global economic growth in 2023, reflecting the continuing drag from the war in Ukraine as well as inflation pressures and the high interest rates engineered by central banks like the U.S. Federal Reserve aimed at bringing those price pressures to heel.

Since then, China has scrapped its zero-COVID policy and embarked on a chaotic reopening of its economy, though consumers there remain wary as coronavirus cases surge. In his first public comments since the change in policy, President Xi Jinping on Saturday called in a New Year’s address for more effort and unity as China enters a “new phase.”

“For the first time in 40 years, China’s growth in 2022 is likely to be at or below global growth,” Georgieva said.

Moreover, a “bushfire” of expected COVID infections there in the months ahead are likely to further hit its economy this year and drag on both regional and global growth, said Georgieva, who traveled to China on IMF business late last month.

“I was in China last week, in a bubble in a city where there is zero COVID,” she said. “But that is not going to last once people start traveling.”

“For the next couple of months, it would be tough for China, and the impact on Chinese growth would be negative, the impact on the region will be negative, the impact on global growth will be negative,” she said.

In October’s forecast, the IMF pegged Chinese gross domestic product growth last year at 3.2% – on par with the fund’s global outlook for 2022. At that time, it also saw annual growth in China accelerating in 2023 to 4.4% while global activity slowed further.

Her comments, however, suggest another cut to both the China and global growth outlooks may be in the offing later this month when the IMF typically unveils updated forecasts during the World Economic Forum in Davos, Switzerland.

U.S. ECONOMY ‘MOST RESILIENT’

Meanwhile, Georgieva said, the U.S. economy is standing apart and may avoid the outright contraction that is likely to afflict as much as a third of the world’s economies.

The “U.S. is most resilient,” she said, and it “may avoid recession. We see the labor market remaining quite strong.”

But that fact on its own presents a risk because it may hamper the progress the Fed needs to make in bringing U.S. inflation back to its targeted level from the highest levels in four decades touched last year. Inflation showed signs of having passed its peak as 2022 ended, but by the Fed’s preferred measure, it remains nearly three times its 2% target.

“This is … a mixed blessing because if the labor market is very strong, the Fed may have to keep interest rates tighter for longer to bring inflation down,” Georgieva said.

Last year, in the most aggressive policy tightening since the early 1980s, the Fed lifted its benchmark policy rate from near zero in March to the current range of 4.25% to 4.50%, and Fed officials last month projected it will breach the 5% mark in 2023, a level not seen since 2007.

Indeed, the U.S. job market will be a central focus for Fed officials who would like to see demand for labor slacken to help undercut price pressures. The first week of the new year brings a raft of key data on the employment front, including Friday’s monthly nonfarm payrolls report, which is expected to show the U.S. economy minted another 200,000 jobs in December and the jobless rate remained at 3.7% – near the lowest since the 1960s.

Source: reuters.com