Last week I talked about the Santa rally. If you’ll excuse the continuation of a theme, I’d like to focus on another flavour of what is generally a quiet month.
‘Tis the season for giving. For many analysts, that means dishing out predictions for the year ahead. Bloomberg run a survey of analysts/strategists every year and the mean projections are always positive.
But this time it is different. For the first time this century, the average Wall Street prediction is for the US market to generate a small negative return in the next 12 months. Not only have the boys and girls who cry bull every year changed their tune, they are no longer singing from the same hymn sheet either. The range of forecasts about where the American market will end 2023 is wider than at any time since 2009. It’s almost as if nobody really knows what is going to happen.
I chose the words to the start of the last paragraph very carefully, and before penning them made sure I was standing at a safe distance. For ‘but this time it is different’ is of course the most dangerous combination of words an analyst can utter.
Generally speaking, it makes sense for analyst predictions to be bullish. Global markets have trended up for as long as anyone can care to remember. Of course, in reality the journey is never as smooth. Those pesky black swan events keep coming along and spoiling everyone’s fun. And that is what makes this set of predictions so difficult to get to grips with.
It’s not that I think markets can’t fall. Of course they can. There are any number of negative catalysts that could prompt a decline. Inflation could persist longer than forecasts imply, corporate margins could be lower than consensus, or any recession might end up being more painful than is pencilled in. The issue is that these catalysts generally need to be unanticipated shocks. When these same analysts (or at least their colleagues in these same research houses) are producing the consensus numbers for inflation, profitability and GDP, how can they be expecting negative surprises? The implication is that they are saying their own numbers are wrong! It’s all very confusing.
The other elephant in the room is that history tells us it is very brave, and often very stupid, to bet against equity markets for a decent period of time. Corporations are centres of innovation and entrepreneurialism. The banking crisis of yesteryear is evidence that we need sensible regulation, compliance, and appropriate codes of conduct too, but we shouldn’t ignore that corporate output can be extraordinary. Just look at the pharmaceutical sector’s response to the pandemic, or the innovations that have come out of Google, Apple and Microsoft in the last 20 years. There is no doubt that the best companies can deploy capital extremely efficiently to grow, innovate and create wealth for shareholders. I know which side of that deal I want to be on.
So, as we look ahead to 2023, the contrarian in me says we should embrace the uncertainty that’s around. Fear of the unknown – in this case worries around the trajectory of interest rates, inflation and the pace of growth – will always weigh on markets in the short term, but will just as surely pass at some point.
One of the market’s biggest concerns just now is it doesn’t know how to interpret the Fed’s cryptic statements. The next FOMC decision is due this week, and we’re also expecting ECB and BoE announcements. I expect all three to raise rates by half a percentage point. Absent a rate surprise, the main focus will be on Jerome Powell’s subsequent remarks. These will no doubt prove to be a catalyst for a reaction – either up or down. Punting on which is of course folly, but
one can see a situation where sentiment changes quickly. The Chinese rowing back on ‘zero Covid’ measures has helped the market in Hong Kong jump by a third in six weeks. Sizeable moves are all the more likely given the significantly larger than average amounts of cash on the sidelines waiting to be redeployed.
I’ll finish with a (hopefully) interesting aside which is diagrammatically opposite to the long term view we seek to adopt. When there is a world cup game on during market hours, a scramble to place trades before kick off sees volumes rise in the participants’ domestic exchanges, but then fall back by up to 29% during the game itself. It is even thinner when a goal goes in. So, next time you are caught watching the game just say it’s because you don’t want to be stung by greater volatility, lower liquidity and thus heightened transaction costs. Unfortunately, you’ll now need to wait four years to wheel that excuse out.
My congratulations again to those who answered last week’s teaser correctly. ‘Ladbaby’ has been the UK’s Christmas number one for each of the last four years. The music may well be awful, but it is all in the name of charity.
This is the last column of the year – so I take the opportunity to wish you all a very merry Christmas, and a prosperous 2023.
George Salmon – Senior Investment Analyst
All charts and data sourced from FactSet
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