By Bhasker Yadav
After 2022 came to a closure, investors thought of it as, "good riddance." While many experts predicted a recession in 2023, there is a chance that a new bull market will begin now at the midpoint of 2023. This is why.
Inflation is cooling off.
There is no denying that the stock market is benefiting from the most recent inflation data. When the October Consumer Price Index report was released on Nov. 10 and showed inflation was lower than anticipated, the S&P 500 increased by more than 5%, and the Nasdaq rose by almost 7%.
The headline number increased 7.7% year over year, less than the 7.9% economists had predicted and below the 8.2% estimate in September. The total rate of inflation, which was 7.7%, was the lowest since January, and the core rate, which does not include the volatile food and energy categories, decreased from 6.6% to 6.3% year-over-year growth in September.
While those numbers remain high, they are unquestionably going in the right direction. The trend should continue to improve, given that the pace of inflation month over a month has already slowed dramatically. Consumer prices have only risen by 0.9% over the past four months or 2.7% annually. Energy prices are mainly to blame for this, although other categories have also moderated.
It makes sense why inflation is slowing down. Due to rising interest rates and recession expectations, businesses and consumers have been more frugal with their spending. The third quarter saw a dramatic decline in the demand for digital advertising, and retail behemoths like Amazon and Target have forecast exceptionally dismal holiday quarters. Additionally, oil prices have fallen by more than a third from their peak earlier this year and are currently around their lowest point.
Although many unforeseeable events affected inflation in this year, the trend toward slower price increases is evident, which could help lift stocks higher in 2023 again.
The Fed pivot is coming.
The so-called Fed pivot, or the central bank's anticipated decision to cease raising interest rates, maybe the market event investors look forward to in 2023.
After four consecutive 75-basis-point increases to the fed funds rate, it is more likely than not that investors will see a change in the central bank's monetary policy sooner rather than later. The most recent Federal Open Markets Committee meeting's minutes state that a significant majority agreed that a slower rate increase schedule "would likely soon be appropriate." According to the Fed's "dot plot" from September, which displays the central bankers' predictions for future rates, they only anticipate small rate increases in 2023.
One of the leading causes of this year's stock market drop has been the Fed's rapid rate hikes, which it is carrying out to control inflation. Market equilibrium should be reached after rate hikes halt.
The good news for investors is that the job market has held up well despite the Fed raising rates, even though a recession is still highly likely. Therefore, 2023 may witness a scenario where benchmark interest rates fluctuate between 4% and 5%, but the job market is still robust. In that scenario, it's likely that the economy would avoid a recession and that stocks would rise.
The war in Ukraine could come to an end.
Geopolitical events may significantly impact markets, and the conflict in Ukraine is a prime example. Following Russia's invasion of its neighbour, oil prices surged and have stayed high ever since. Meanwhile, the European economy is in danger of collapsing due to rising energy prices.
Due to the fighting, food costs have increased dramatically over the past year. Ukraine and Russia both produce significant quantities of agricultural commodities. The Organization for Economic Cooperation and Development has warned that the world economy has suffered greatly due to the war. The war’s conclusion would help stabilize food and energy prices. Still, there is no going back to the period before the war broke out, and Russia is sure to remain an international pariah.
Although the battle can last for years, there are indications that both sides would choose a quicker conclusion. According to The New York Times, while Russian spokespeople have shown openness in negotiations toward a final resolution, Ukraine is hopeful that recent wins could be the start of the end of the conflict.
Though predicting the battle’s conclusion in this year may be fanciful, it shouldn't be discounted as a possibility. With declining inflation and a change in the Fed's interest rate policy, those factors might have investors singing a very different melody a year from now.
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