Economic Insights Newsletter

December Market Update: A Santa Claus rally for stocks or just a lump of further losses?

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The challenge will be reducing inflation and creating enough consumer demand reduction to lower prices even further into 2023 without pushing the U.S. economy into a recession.

Despite the quarter over quarter decrease in the number of S&P companies citing the term “recession” on their earnings calls, companies have been more pessimistic than normal on their Q4 2022 performance outlook with analyst expectations of a decline in earnings of -2.1% for Q4 2022 but earnings growth of 5.2% for current year (CY) 2022. Looking forward to Q1 2023 and Q2 2023, analysts are projecting earnings growth of 1.6% (Q1 2023) and 0.9% (Q2 2023) and earnings growth of 5.7% for CY 2023. You can see, in Chart 3, the percentage of companies in each sector of the S&P 500 above, in-line, or below their earnings estimates.

Chart 3


Markets finishing 2022 on Santa’s Nice list?

With the current headwinds described above, there is potential holiday cheer that can spread throughout the markets into year end. Although inflation is still above the current Fed target, the rate of inflation is declining, which provides hopes for the markets in a reduction of the Feds QT policy may be coming to an end within the next few months. Most of the shock and awe of the markets have been dealt with and it is possible that the worst of the market volatility is behind us.

The Federal Reserve has increased interest rates by .75% for the past four rate hikes and now we may be looking at the first projected .50% rate hike since May 2022. This can also provide signs to the markets on opportunities for heavily discounted sectors of the market such as the semiconductor sector. Also, Q3 earnings season EPS and growth were better than expected and though Q4 earnings estimates may be projected lower, the U.S. consumer still remains strong in the face of declining inflation.

The last point is biggest difference in the markets now for new and current stock investors is “TINA” vs “TARA”. When interest rates where close to 0% during the Fed’s previous Zero Interest Rate Policy (ZIRP), there was an acronym that stipulated, “There is No Alternative” (TINA). It’s either stocks or dividend paying stocks or earn nothing in cash and/or bonds. Now, the risk-free rate of return on CDs and T-bills within 12 months are paying over 4.5%. TINA has changed to TARA or “There Are Reasonable Alternatives.” Stocks now have to compete with 4%+ risk free U.S. T-Bills or FDIC insured CDs. This may provide some hesitation for wealthy investors with large cash positions, who are near or in retirement, to reassess their options and allocation percentages into the stock market.

I remain cautiously optimistic for stocks going into 2023. Santa may still come down the chimney bearing gifts but, we may just end up with socks or slippers instead of the big gift of a rally that we have been waiting for.

Christopher Brown, CIMA®, CRPC™, Financial Advisor, Synovus Securities, Inc.

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