As is customary in the second half of the fourth quarter, market strategists and economists on Wall Street released year-ahead outlooks outlining key trades and themes in the markets for the year ahead.
The latest roundup comes courtesy of Bank of America’s TJ Thornton and a host of other in-house strategists and economists, who shared an overview of Bank of America Global Research’s top 10 macro themes on Monday, assigning each theme to the Bank of America strategists or economists who proposed it.
Some of the most important themes for markets include the idea that markets won’t activate “risk” until the middle of the year, that a global recession is almost inevitable, and the idea that the economic reopening of China after years of COVID-19 inspired lockdowns could have major ramifications for commodities, especially industrial metals.
Markets will activate risk in mid-2023
As a recession and credit shocks hit risky assets, investors should favor long bonds, especially 30-year Treasuries, in the first half of 2023. The idea that the S&P 500 typically hits a low six months before the end of the recession suggests a rebound starting around the middle of the year. As BofA expects U.S. equities to hit new lows in the first half of next year, Chief Investment Strategist Michael Hartnett reiterated his oft-repeated recommendation to equity investors: “Ship at the S&P 3,600, bite at 3,300, gorge at 3,000”.
A recession is almost inevitable in the United States, the euro zone and the United Kingdom
Expect a mild US recession in the first half of 2023, with the risk of it starting later in the year. Europe is likely to experience a recession from this winter, with a slight recovery thereafter, according to Ethan Harris, head of global economic research at BofA.
Expect a rate cut by the end of the year
BofA expects the Treasury yield curve to disinvert as rate volatility declines. By the end of the year, credit strategists estimate that yields on two-year notes and 10-year notes will end at 3.25%. Sectors hit by higher rates in 2022 could benefit in 2023, according to BofA rates strategist Mark Cabana.
China’s reopening could be ‘bumpy’ until end of 2023
“We expect a gradual reopening of China from now on with the removal of most restrictions [in second half of 2023,” said BofA’s Helen Qiao, chief economist for Greater China. BofA expects China’s economy to grow by 5.5% next year, which is higher than the consensus on Wall Street.
EM should produce strong returns after volatile 2023
“Once inflation and rates peak in the U.S. and China reopens, the outlook for [emerging markets] should become more supportive,” said David Hauner, head of emerging markets cross-asset strategy.
Industrial metals are on the rise
In particular, copper prices could increase by 20% next year. “Recessions in key markets are a headwind, but the reopening of China, a spike in the dollar and above all an acceleration in investment in renewable energy have more than offset these negative factors,” said Michael Widmer, chief strategist of the metals.
Oil prices could be higher for longer
“Russian sanctions, low oil inventories, reopening China and an OPEC willing to cut production if demand drops are keeping energy prices high. Brent Crude is expected to average $100 a barrel during 2023 and peak in the second half at $110,” said Francisco Blanch, head of global commodities, equity derivatives and multi-quantitative investment strategies. -assets.
Relocation to stimulate capital spending
A strong labor market, U.S.-China decoupling and higher environmental, social and governance standards should keep capital spending high, said Savita Subramanian, head of U.S. equities and quantitative strategy at BofA Securities.
The consumer gets some price relief
Inflation will likely moderate next year, but some workers will likely see job losses as the US unemployment rate peaks at 5.5% in the first quarter of 2024, according to Michael Gapen, chief US economist . at BofA.
End of Fed hikes means more positive backdrop for credit
Investment-grade credit is expected to rebound next year as weaker growth prospects and higher rates cause management to shift the focus to debt reduction. US Investment Grade strategist Yuri Seliger forecasts a total return of around 9% on Investment Grade credit in 2023.
Stocks rose sharply on Monday, with the Dow Jones Industrial Average DJIA,
jumping nearly 530 points, or 1.6%, while the S&P 500 SPX,
increased by 1.4%. The S&P 500 is down more than 16% since the start of the year.