The S&P 500 went down 19.2% in 2022 through Dec. 16, and has been on track for one of its worst calendar year performances since the global financial crisis in 2008. Many of the themes that dragged the stock market prices down in 2022 are unlikely to go away any time soon. Kavan Choksi, an experienced finance and business expert, mentions that the inflation has been a major topic of discussion on the Wall Street throughout the year, and it shall remain so in 2023 as well.
Kavan Choksi underlines certain trends that are likely to influence the US stock market in 2023
Concerns associated with the negative impact of inflation and the Federal Reserve’s monetary tightening ended by triggering a sell-off in risky assets in 2022. Tech stocks, growth stocks, and cryptocurrencies were especially hit hard. Even though the Fed has made a good degree of profess on inflation in the second half of 2022, interest rates, wages and prices across the country continue to rise. Even though the economy of the United States has been mostly resilient throughout 2022, weakening consumer sentiment and a sharp downturn in the housing market are two signs that indicate that cracks are starting to form.
In the current landscape, it becomes important for investors to keep a close eye on the market and position their portfolios to limit risk and capitalize on opportunities. The trends that are most likely to influence the US stock market in 2023 include rising interest rates, elevated inflation, and slowing economic growth.
Inflation has been a major concern for both investors and Feds in 2022. CPI or Consumer price index, year-over-year growth peaked at a four decade high of 9.1% in June 2022. The Fed has been aggressively raising interest rates since March in an attempt to get inflation close to its long term target of 2%. These rates include consecutive increases of 0.75 percentage point from the month of June to November. As a result, the fed fund target rate has also increased from almost zero in early 2022 to somewhere between 4.25% and 4.5% heading into 2023. As CPI dropped to 7.1% for November, odds are that the Fed is making progress in its battle against inflation.
Elevated inflation, in many ways, is a sign of an overheating economy. Tighter monetary policy acts as the primary ammunition for the Feds against an overheated economy. Apart from allowing 95 billion in assets to roll off its balance sheet each month, the Fed has been raising interest rates to cool down inflation. Higher interest rates may increase borrowing expenses for both consumers and companies, thereby slowing economic growth. Looking ahead to 2023, the Fed is quite likely to raise interest rates until it pushes inflation significantly lower. In the opinion of Kavan Choksi Wall Street analysts are taking note of the softening economy. Along with a sharp drop in stock prices, many investment banks expect a period of recession in 2023. In the weakening economic environment, smart stock selection will become more important than ever, and soaring interest rates will shift the risk dynamics in the stock market.