22 Dec 2023 OUTLOOK
Many firms are publishing 2023 outlooks. As noted several times 2022 was one for the record books as the S & P 500 fell almost 50% more than the most bearish prognosticator. For the exception of commodities, all major asset groups and strategies were down by double digits, the result of the most aggressive Fed in forty years.
Risk adverse Treasury Inflation Protected Securities (TIPs) were down almost 12%. The popular and semi risk adverse 60% equity and 40% bond portfolio is posting a 19% decline according to Bloomberg. JP Morgan’s data suggest the typical retail account is down 40%.
Perhaps the adage of “Don’t Fight the Fed” has taken upon a new dimension.
Bloomberg writes the range of 2023 forecasts is the greatest in history with some firms projecting an additional 20% decline while others are predicting a 15% advance. The current mean is about a 7% gain. with most anticipating a change in monetary policy.
Since 1928, the S & P 500 has only fallen two straight years on four occasions: The Great Depression, of 1929-32 WWII of 1939-1941, the oil crisis if 1973-74 and the dot.com implosion of 2000-02, as per Bloomberg.
Will 2023 be the fifth?
Most believe it will be dependent upon the Fed and inflation. Will inflation decline to the 3% range as projected by Wall Street? The Fed is suggesting inflation will only drop to 5%.
A major component of all inflation indices is Owners’ Equivalent Rent (OER) or what one can rent their home for if it was indeed rental. Depending upon the inflationary indicator, OER is between 30% and 32% of the index.
In years past, the government changed how OER is calculated to reduce the reported inflation rate, a change in calculation methods that is well documented and recently discussed by former Treasury Secretary Larry Summers. Summers, et.al. stated if OER was calculated in a similar manner as 20 years ago, the rate of inflation would be in the low teens.
A headline read yesterday “US Rent Inflation Slows Sharply in New Index Built by Fed Team.” Cynicism suggests the Fed is again moving the goal posts to help attain projected goals.
The federal deficit is surging, now over $31 trillion. The recent $1.7 trillion omnibus bill is regarded as “The Ugliest Omnibus Bill Ever” according to the WSJ as there absolutely no spending restraints.
Many times the two month 87% increase in debt service coverage to $103 billion over the comparable period last year has been mentioned, the result of surging inflation, interest rates and spending.
Cynically writing, if the goal cannot be obtained by current calculation methods, again change the calculation methods so the goal can be obtained. There is a well-defined precedent of such action.
Nominally changing topics, the global pile of bonds with subzero yields shrank yesterday as Japan’s two-year sovereign yield briefly climbed into positive territory for the first time since 2015. The worldwide stock of negative yielding debt stood at about $686 billion on Tuesday, down from a peak of $18.4 trillion reached two years ago according to Bloomberg.
As recently as seven years ago it was thought as impossible to have negative yielding debt.
Commenting on yesterday’s market activity, equities staged a moderate advance, the catalyst was an improvement in consumer confidence, an improvement based in the inflationary expectations component of the survey, and better than expected earnings. Treasuries were mixed.
What will happen today?
Last night the foreign markets were mixed. London was up 0.44%, Paris down 0.03% and Frankfurt down 0.19%. China was down 0.46%, Japan up 0.46%, and Hang Seng up 2.71%.
Futures are nominally lower, reassessing the economic and monetary outlook. The 10-year is up 3/32 to yield 3.65%.