01. FEDERAL RESERVE
The Federal Reserve will continue its course during the 1st quarter of 2023 and will likely raise the overnight target an additional 50 basis points. This will take the upper range to 5.00%, and the Prime Rate will likely hit 8.00%. These rates will be the highest since the 3rd quarter of 2007.
02. PRICE OF GOODS
Prices for goods should fall over the next couple of quarters, as U.S. consumer demand wanes. Unfortunately, food prices will likely remain stubbornly high due to a variety of factors: avian flu, transportation issues, the weather, higher feed costs and surging borrowing costs for farmers.
03. INEQUALITY
Since food costs are a higher percent of lower-income household budgets, wealth and income inequality could increase during the year.
04. INFLATION
The trailing 12-month inflation data will continue to trend downward in aggregate. By the middle of 2023, the Fed should have more than enough reason to stop raising rates should it so desire. Whether it will is still anyone’s best guess.
05. GDP
The Gross Domestic Product (GDP) equation will look bizarre at the start of the year. Consumer expenditures on goods will be negative but spending on services will be positive. Real estate and inventories will be a drag on the I component. However, improvement in our trade deficit should offset some of the inventory correction. Finally, government spending might be enough to keep us out of deep red territory, thanks to the recent omnibus bill.
06. FISCAL STIMULUS
Unfortunately, after that money is spent, fiscal stimulus out of Washington will become something of a unicorn due to a sharp increase in our debt service payments. This is a result of out-of-control spending and higher interest rates. Unfortunately, corporate America and the municipal markets will also feel the pinch, which could put pressure on both income statements and public budgets.
07. CHINA
The geopolitical wild card next year will be China. Simply put, the Western world doesn’t fully understand Beijing, but it had better start. Moving forward, to get things accomplished on the global stage, the West will have to deal with China as an equal.
08. UKRAINE
The situation in Ukraine will eventually come to an end in 2023. Regardless of the official outcome, Russia will exit the conflict significantly weaker on the global stage. While it will still be a formidable foe, China will take its place as the country most likely to challenge the U.S. militarily.
09. JOBS
The number of job openings will gradually decrease due to tepid economic activity; an acknowledgment that the workers simply aren’t out
there; and businesses starting to spend more on technology to provide the necessary capacity.
10. INDIA
India will have much to gain, as western countries try to diversify away from the People’s Republic. While the long-term trend is extremely positive for the Indian economy, investors have built in some very rosy earnings projections that will be hard to meet. This will make investing in India something of a roller-coaster ride.
11. INTERNATIONAL INVESTING
In aggregate, international investing presents a challenge in the upcoming year. It is unclear how aggressive the Bank of England and the
European Central Bank will be in tightening credit in already stagnant economies. Essentially, international investing will be a bet on how
stupid global central bankers will be, as opposed to actual prospects for economic growth.
12. ENERGY POLICY
This winter will prove the need to have a coherent, comprehensive energy policy, and not just “green or renewable” at any cost to the grid
and economy. Perhaps the powers that be in Washington will realize it.
13. LARGE CAP GROWTH
In 2023, the easy money betting against large cap growth and tech stocks will be over. However, that doesn’t mean they will generate massive returns either. Investors will likely continue to hold onto their value and defensive positions until it becomes apparent the Fed is going to take its foot off the brake.
14. FIXED-INCOME MARKETS
The fixed income markets should prove interesting next year. While decreasing inflation data would ordinarily keep rates in check, the
financial markets’ ability to absorb the global mountain of supply in another slow growth year is questionable. Getting that bet correct in
2023 could make the difference between beating the benchmark or not.
15. REAL ESTATE
The first half of 2023 is going to be a tough one for both commercial and residential real estate. Demand for new deals completely dried up
during the 4th quarter of 2022. Some time and lower interest rates will get these sectors back on track.
16. MONEY FLOW
By the second half of 2023, the light should be at the end of the proverbial economic tunnel. The Fed should be able to stop raising rates and even potentially start cutting them. This should steepen the lending curve and get money flowing in the U.S. economy again.
17. SECURITIES
The prepayment speeds on mortgage-backed securities will slow to a crawl due to higher borrowing rates. This will push out the duration, or interest rate sensitivity, of these securities, making them more volatile and potentially unattractive.
18. CORPORATE EARNINGS
For the first time since the start of the pandemic, corporate earnings will likely be less than current analysts’ predictions. It will be interesting to see how investors react.
19. PRIVATE EQUITY
New private equity deal flow will likely slow, as funds have a difficult time fully valuing assets in the higher interest rate environment. The temptation will be to keep prices high; however, the reality could be much different.
20. ENERGY PRICES
Thanks to more normal domestic economic activity in China, energy prices could remain elevated in 2023 as existing supply won’t be able
to keep up with global demand.