"The market is discombobulated, and price action is trapped between inflationary drivers on the one hand and a regulator-induced recession on the other; these are the most demanding markets for investors." | Martin Davies
What an incredible year for traders, such a learning experience, but for investors, it has been gruesome with nowhere to hide except in the dollar index. From bonds to commodities, gilts and global equities, it's the worst year since 2008.
Equity funds were hit by outflows of almost $42 billion — the highest ever — in a week when the Federal Reserve, the European Central Bank and the Bank of Japan all sounded staunchly hawkish
Record Outflows Cap worst year for Stocks Since 2008 | Bloomberg LINK
All indicators taking in logistics, disrupted supply chains, commodity prices or an inverted yield curve are showing us that most markets are struggling in one sense or another.
A Grim Trade Tracker | Bloomberg LINK
It would follow the first part of the incoming year is likely to be more of the same, unsustained rallies and big reversions that trap investors who believe the market has bottomed. The inflation versus recession debate where bulls simply can't win because central banks contain them is likely to prevail in the short term.
Worst Year for Equities since 2008 LINK
As central banks continue to raise and hold rates, they lift the borrowing costs for firms struggling to adjust or grow their business. There is currently a record number of zombie entities (firms that cannot service their interest payments) in the Russell 3000 and we could even see a wave of defaults as a result.
All that said, the global economy surpassed $100 Trillion this year but the cost of reigning in inflation seems to be disproportionately punishing the poorer — 68% of total wealth is owned by 10% of earners LINK.
In Perspective
To put things into perspective, the S&P 500 is down ⬇ 19.4% for 2022, its fourth worst decline since its 1957 inception. The Nasdaq, which makes up many of the technology and growth stock listings was worse and declined an incredible ⬇ 33% across 2022. The Dollar Index rose ⬆ 7.8% while the Euro lost ⬇ 5.9%. The Dow Jones Industrial Average only fell ⬇ 8.9% over the year as value stocks which make up a higher proportion of this index fair better in bear markets than growth stocks.
If you were fooling around or even considered holding cryptos, your portfolio was literally obliterated. Bitcoin is down ⬇ 64%, Ether is down ⬇ 68% and the joke currency Dogecoin may have come out trumps in the trio but was still tragically ⬇ 60% less in value than it was at the beginning of 2022.
Even Cathy Woods acknowledges the challenges in her "profitless tech and concept capital" blog post.
After a 50-90% decline in the value of pure-play innovation strategies during the past 18 months as rising interest rates lowered the present value of future cash flows, equity markets seem to have bowed to GAAP-based EBITDA
Catherine Wood | ARK Invest LINK
So it's time to buy the dip then and some investors are testing these waters by acquiring value stocks by averaging down when the market ebbs. However, 2023 is likely to see a continuation of what has been served up in 2022; simply changing the calendar year doesn't render Putin's war of terror on Ukraine any less tragic or Central Bank inflation Targets any less stubborn.
The first few days in January may be buoyant from the famous 5 Days of January Myth and the January Effect but beyond that, certainly when the earnings season kicks off, be ready for some surprises in both directions one can only hope ... but in reality, we're likely to endure more sideways price action on a lot of assets.
Forget the buy-and-hold 2010s, where purchasing a 60/40 portfolio and going to sleep generated 10%+ returns per year with minimal volatility and drawdowns.
Alfonso Peccatiello | The MacroCompass LINK
The Inflation Fed Geopolitical Environment of the next few years reduces the effectiveness of Buy & Hold approaches to portfolio management, and investors may need to take a much more active role in managing their investments.
Federal Reserve System | Balance Sheet Trends LINK
Perhaps one of the biggest white elephants in the room is the fed's balance sheet.
Most investors are only worried about interest rate hikes or anything that drives them, yet recent balance sheet trend reviews demonstrates how bloated fed's balance sheet has become — the Federal Reserve may taper more aggressively, and this is something the rate-setting committee is likely to consider in line with their interest rate management program.
Around the traps
Let's take a brief look at what they're saying around the globe.
PUTIN'S FIREWORK DISPLAY
Putin's resolve tragically has no off-ramp, and his New Year's Firework gift to Ukraine was literally that — Russia launched 45 Iranian-made drones onto Kyiv, all of which were shot down by Ukraine's air defences. Several points of observation we can draw from this are [1] Iranian weaponry isn't so crash hot, [2] there is unlikely to be a resolution to this crisis anytime soon and [3] Ukraine is becoming super resilient overtime.
Ukraine's first Victory in 2023 was on the opening of the year, that's good to see | FT [LINK]
Theoretically, from the perspective of the markets, we may endure various knock-on effects throughout 2023 from this corner of the world, just as we did in 2022.
Although, many investors are now Hyperbolically Discounting [LINK] the Ukraine crisis and have quite simply moved on mentally with the threat. We're going to need something extreme and more demented from Putin's corner to derail the markets in 2023.
THE IMF 2023 FORECAST
As the year turns, they're are coming out in droves to spread warnings of demise; the latest official comments from the IMF Chief, Kristalina Georgieva warns of a tough year ahead, more troublesome than 2022, if that's imaginable.
We expect one-third of the world economy to be in recession and that there is a 25% chance of global GDP growing by less than 2% in 2023. The US may avoid recession but the EU will be in recession next year.
Kristalina Georgieva | International Monetary Fund
It's hard to see a divergence of European and US monetary policy at this point in time but let's watch how this pans out.
EUROPEAN CENTRAL BANK
The European Central Bank took a slightly different angle on its negative rhetoric, targeting wage growth as the core problem fueling inflation.
We know wages are increasing, probably at a faster pace than expected and we must not allow inflationary expectations to become de-anchored or wages to have an inflationary effect.
Christine Lagarde | European Central Bank
The ECB has raised interest rates by 2.5 percentage points since July in an attempt top quash a surge in inflation and the promise of even more policy tightening over year ahead is already out there.
Then we have the infamous Nouriel Roubini resurfacing with his "Advanced economies and emerging markets are increasingly engaged in necessary "wars" – some real, some metaphorical" piece [LINK] that highlights five wars that trap us in an indefinite systemic loop of damnation.
What can we say, Happy New Year, let 2023 be upon us ... anyone up for a January 2023 rally?
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