Control Panel: Predictions for 2023

I’d like to remind everyone that the predictions for the stock and bond markets for 2022 were totally off-base and missed by a mile. On 12/31/ 2021, the markets were flying high. Even though inflation was rising, the Federal Reserve said it would be “transitory.” The Covid omicron variant was reaching a high peak but that didn’t seem to affect the market much since the economy was open.

The “everything bubble” was making investors happy. Stocks, bonds, real estate, crypto currency and other investments were all making highs.

OOPS.

We are now in 2023. All METARs know that the “everything bubble” popped in 2022 since the Federal Reserve belatedly raised the fed funds rate rapidly to combat sticky inflation and Russia invaded Ukraine.

Professional investors have made many predictions about the outlook for 2023.

" To kickstart the new year, Bloomberg News has gathered more than 500 calls from Wall Street’s army of strategists to paint the investing landscape ahead. And upbeat forecasts are hard to find, threatening fresh pain for investors who’ve just endured the great crash of 2022.

As the Federal Reserve ramps up its most aggressive tightening campaign in decades, the consensus view is that a recession, albeit mild, will hit both sides of the Atlantic with a high bar for any dovish policy pivot, even if inflation has peaked."

https://www.bloomberg.com/graphics/2023-investment-outlooks/

Fed Chair Jerome Powell’s last major speech was on 11/30/2022. I like to watch him speak. He’s straight-spoken and clear.

January 4, 2023, Reuters

Fed wants ‘flexibility’ on rates as inflation remains key focus, minutes show

By Howard Schneider

All officials at the Federal Reserve’s Dec. 13-14 policy meeting agreed the U.S. central bank should slow the pace of its aggressive interest rate increases, allowing them to continue increasing the cost of credit to control inflation but in a gradual way meant to limit the risks to economic growth…

“Participants reaffirmed their strong commitment to returning inflation to the (Federal Open Market) Committee’s 2% objective,” the minutes said. "A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price stability goal…“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023…”… [end quote]

But the markets don’t believe that the Fed will hang tough. The temper of the market is still bubbly. There’s no sign of true capitulation or revulsion.

The Fed’s rate raises have reduced inflation. Month-to-month inflation has dropped even though year-over-year inflation is still high. Goods price inflation has dropped. The Fed is watching inflation in services, largely wage increases.

Unemployment is at a record low of 3.5%. According to the Fed’s economic models, this is below the neutral rate of unemployment and thus inflationary. Unemployment Level/Job Openings: Total Nonfarm is the lowest on record, showing about 2 job openings for every unemployed person. “Unemployed” people have actively sought work in the past month. People who are not actively seeking work are counted as “out of the labor force participation” rather than “unemployed.”

The November JOLTS report (released last week) showed little change.

The December 2022 Jobs Report

Employment Situation Summary, December 2022

Total nonfarm payroll employment increased by 223,000 in December, and the unemployment rate edged down to 3.5 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in leisure and hospitality, health care, construction, and social assistance. [end quote]

Mike Shedlock analyzed the employment report carefully. The BLS news release presents statistics from two monthly surveys. The household survey
measures labor force status, including unemployment, by contacting workers at home and asking them about their work situation. The establishment survey contacts employers and asks them about their workers. If everyone has a full-time job the numbers of workers should be the same from both surveys. But they are actually widely different.

Mish’s conclusion: Full time employment is down 288,000 since March and down by 444,000 since May. People are taking on second part time jobs to make ends meet. But overall employment (the total number of people working) is stagnant.

The Labor Force Participation Rate, age 25-54 Yrs, is growing and is now 82.5%, close to the pre-pandemic level. The Labor Force Participation Rate, age 55 Yrs. & over fell after the pandemic and is stagnant, now 38.8%.

The economy is beginning to contract. This was the objective of the Federal Reserve’s campaign to raise interest rates and not a surprise.

https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/december/

Economic activity in the manufacturing sector contracted in December for the second consecutive month following a 29-month period of growth, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®. The December Manufacturing PMI® registered 48.4 percent, 0.6 percentage point lower than the 49 percent recorded in November. Regarding the overall economy, this figure indicates contraction after 30 straight months of expansion.

https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/december/

Economic activity in the services sector contracted in December after 30 consecutive months of growth — with the Services PMI® registering 49.6 percent — say the nation’s purchasing and supply executives in the latest Services ISM® Report On Business ®. In December, the Services PMI® registered 49.6 percent, 6.9 percentage points lower than November’s reading of 56.5 percent. [end quote]

The Control Panel is neutral. There aren’t any clear signals. Stocks are up and down. Bonds are up and down. This is noise.

https://www.wsj.com/articles/last-year-investing-seemed-easy-not-anymore-11673128421

The USD has stabilized at a lower level than before. Gold is still rising but oil, silver and copper have stabilized. Natgas is falling.

The Price-to- earnings ratio of the S&P 500 based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted P/E Ratio (CAPE Ratio) has shown some air let out of the bubble but is still twice the historic median.

The S&P/Case-Shiller U.S. National Home Price Index has shown a slight drop but is still in bubble territory.

At 3.7%, the real yield of the 10 year Treasury is still negative based on today’s inflation rates but the market expects inflation to drop to 2.2% over the 10 year time frame.

The METAR for next week is cloudy. I expect the NASDAQ to fall due to rising interest rates but the SPX may hold its own or even rise a little. Note the pattern of lower highs and lower lows – if the SPX rises next week that pattern may be broken. But beware – the Fed is still raising rates. Picture what the market will do with a Fed funds rate of 5%.

Wendy

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I don’t recall what I predicted last year, but my plan at present is to start averaging excess cash into some of my etfs after the Fed’s next meeting at the end of January. I think stocks will be cheaper this year than last, but I don’t know whether they will move up, down or sideways in the near term.

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The US Dollar Index is still high at about 103.6 and putting large additional funds into the equity market should wait until it’s about 95 or even 90. How much slop do we have in the market? Do the math.

Jeff

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Wendy,

That was never the objective.

The objective is a balance between fiscal policy that does not over tax the top brackets and corporations during an inflationary longer term period and monetary policy. By this I mean the background threat is now inflation. The FED’s position is different than in the 1950s this time around. This time the FED is raising rates to hold off inflation unlike the 50s. Taxes in the 50s were used to hold off inflation.

image

Much greater revenue growth and collections happen long before inflation is cut off by still higher taxes. That is why the FED is raising rates.

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I wish people quoting Mish would look deeper into what he is saying. He does not know much.

The issue with full time jobs is the history of a lot of part time workers with multiple jobs. Those folks have taken a lot of full time jobs. That is why there are help wanted signs everywhere.

https://www.advisorperspectives.com/dshort/updates/2022/12/08/full-time-and-part-time-employment-a-deeper-look

Snippet

Here is a visualization of the trend in the 21st century, with the percentage of full-time employed on the left axis and the part-time employed on the right. We see a conspicuous crossover during the Great Recession. Since early 2016, the two cohorts have slowly drifted apart, with full-time employment gaining.

Interestingly, this trend has continued, even during the COVID-19 global pandemic and recession. As of October 2022, Full-time employment made up 83.4% of all employment.

adding my comment there are plenty of more full time jobs available but not a lot more people who want full time hours.

Also it is doubtful the economy is beginning to contract. Inflation is well down.

US paper selling off and over valuations of bonds and equities in the market places are the story.

Struck me…1981 to 2020 the FED’s job was to add to the money supply. 2021…the FED’s job is to steady the money supply and keep interest rates maintaining inflation at 2% roughly. Inflation is a constant pressure on rates to go higher. Do not expect rates to drop much if at all during this next five years. Covid is a crazy one off that now can be ignored for econ purposes. Although economics will be impacted by the medical costs of Covid till the ends of our lives and beyond.

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Hey @Leap1 -

Thanks for this post. It seems to go against a lot of what I have been reading about the labor market - namely that job increases are mainly through part-time jobs and not full-time jobs.

So I decided to do some hunting on the link from VettaFi to see what they are all about. I started at LinkedIn to see how big of a company they were, and what they do.

https://www.linkedin.com/company/vettafi/about/

VettaFi, a data, analytics, and thought leadership company, is transforming financial services from an industry to a community—one relationship at a time. Engaging millions of investors annually, VettaFi cultivates an industry leading data-driven ETF platform, built to empower and educate the modern financial advisor and institutional investor.
In addition to providing interactive online tools and research, VettaFi offers asset managers an array of indexing and digital distribution solutions to innovate and scale their businesses.

They are a relatively small organization with 90+ employees based in NYC.

I then checked out their website to see what more I could learn about them.
https://www.advisorperspectives.com/about

I found this - their Predictions for 2023 - with links to previous year’s predictions.

It looks like interesting reading and I may just sign up for their newsletters.

How do you know them? Have you also followed them? Or did you just find this chart / website through a google search? I’m interested to learn if they are just another investment advice peddler or if there is more substance to their research?

Any info would be appreciated.

Thanks,
'38Packard

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38,

Honestly I just Googled them and recognized the quality of this one report.

That is the entire thing even if they are good for this report it is a matter of knowing good information from bad. You obviously care and see this as well.

Markit was the longer term hedge fund information source that went further behind a paywall.

if VettaFi stays more public information that will be valuable. I agree.

I need to read your linked report later today.

BTW it somewhat does not go against that.

It goes against the interpretation by people who take data out of context. That is like being blind and seeing only a shiny light in a room. Wont help the blind man much.

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@Leap1 -

Check out this post. Seems like a 180 from FRED / BLS.

'38Packard

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Wendy posted that or similar information recently.

The juxtaposition of wage growth/inflation v the inflation rate we both know about but reading it this context means more.

The future holds a major reindustrialization meaning wages and the standard of living will continue to improve. But most years inflation will come in slight above wage growth.

We face more of a balancing act ten years from now on wage growth. But not right now. We have time for other factors to come into play in continually improving the standard of living in the US while holding inflation at bay.

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This post was flagged by the community and is temporarily hidden.

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:rofl: :rofl: :rofl:

How do I know the link is good? Should I trust that link?

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@ruleof72yall welcome to METAR.

As all METARs know, it can be dangerous to click on a “naked” link, especially from someone we do not know. If you wish to join the discussion with a linked reference, please copy and paste part of the reference, including the title and author plus a snip showing the part you want to discuss and analyze.

Wendy

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Good call, @Leap1.
If @ruleof72yall doesn’t post a genuine reference in our usual METAR way I will have his post removed.

Wendy

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