Twelve months ago, Tom Lee bet that 2023 would go well.
While many of his Wall Street peers are warning of an impending recession, Lee, a stock market strategist who spent more than a decade researching stocks for JPMorgan before founding his own firm, believes that 2022 We expect the economy to decline in December. Inflation and economic resilience will counter the broader bearish mood.
Mr. Lee was right. Lee’s prediction comes despite political brinkmanship over the country’s debt ceiling, the March banking crisis, concerns over the cost of financing government deficits, the continued war in Ukraine and a new conflict in Israel. The core of this will be realized in 2023. Inflation has fallen, unemployment remains low, and the S&P 500 index has risen by 25%.
Most investors disagreed with Lee’s outlook. More than $70 billion was withdrawn from funds buying U.S. stocks in 2023, according to data from EPFR Global. This year, only a quarter of fund managers that benchmark their performance to the S&P 500 have outperformed the index’s returns, according to Morningstar Direct.
“2023 was the year when people were so convinced that we were going to go into a recession that they looked at everything through that lens,” said Lee, head of research at Fundstrat. “Then some people, like us, said we don’t know what the future holds, but there is little evidence that a recession is coming.”
Looking ahead to 2024, forecasters tracked by Bloomberg share Lee’s optimism more broadly, including analysts at Citigroup and Goldman Sachs. Deutsche Bank equity strategist Binky Chadha, who bet against the Lee deal last year, also expects the bull market to continue.
At the same time, analysts at Morgan Stanley and JPMorgan are predicting that even if a deep recession does not occur in 2023, there will be no full-fledged recession as the full impact of rising interest rates is still felt throughout the economy. It is argued that this does not mean that it has been avoided.
“There are a lot of things that have to go right for us to come out of this unscathed,” said Mike Wilson, chief equity strategist at Morgan Stanley. He revised his bearish outlook in July, but even then he maintained his position that the economy would worsen.
Their views center on the path of inflation and whether the Federal Reserve can bring inflation back to its 2% target before the economy stagnates.
The Fed began putting the brakes on the economy by raising interest rates in March 2022. But the central bank has recently seemed confident that it is getting closer to its goal. The consumer price index rose 3.1% in the year to November, down from a peak of more than 9% through June 2022. Core CPI, which excludes volatile food and energy prices, remains at 4%.
The sooner the Fed achieves its goals, the sooner it can take its foot off the brakes on the economy. The central bank recently predicted lower interest rates next year. Lee said that even without a rate cut, lower inflation and historically high wage growth could encourage consumers to continue spending, providing a further tailwind for corporate profits. .
Others are less confident. Although the labor market remains strong, it has shown early signs of weakness in recent months, with the unemployment rate rising slightly as more people start looking for work. The number of people falling into late credit card and car loan payments is also on the rise, as investors say consumer finance is becoming increasingly tight after the end of student loan forgiveness plans. . Inflation remains above the Fed’s target, and these rifts could widen further next year.
JPMorgan equity strategist Jason Hunter said the market appears to be ignoring the expected slowdown in growth next year. “The stock market appears to be pricing in a very rosy outcome,” he said.
While the service side of the economy, including restaurants, remained strong this year, manufacturing struggled due to overcapacity in 2022.
Energy stocks remain negative this year after an outstanding performance in 2022. Utility stocks, typically a haven when the rest of the market is in turmoil thanks to their stable revenue stream, have fallen more than 10% since January. Small businesses have also slumped, with the Russell 2000 index still up about 15 percent from its previous peak and 18 percent for the year.
For Lee and his growing band of bulls, these unpopular areas of the market present opportunities in 2024. A turnaround in the manufacturing downturn could help struggling companies as companies clear inventory balances and start placing new orders. Catch up in 2023.
Deutsche Bank’s Chadha said economists have consistently underestimated economic growth this year. He thinks it’s likely to happen again.
“We believe that unexpected positive growth will occur and stock prices will rise,” he said.
Those who are more bearish warn that a recovery in manufacturing is by no means certain, and that a decline in these sectors of the market in 2023 means global stock prices will fall if not for the small number of giant technology stocks that have pushed the S&P 500 higher. states that it may be possible. The rise in stock prices will be completely different.
These tech stocks are so dominant that they have even been nicknamed the “Magnificent Seven.” This is a group that includes some of the biggest companies in the market, including Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla. Without them, the S&P 500 would have risen about 10% this year.
“If you don’t see improvement in the average company, to me that’s a risk of a hard landing,” Morgan Stanley’s Wilson said. “If there’s going to be a recession, it’s going to be when these companies decide to lay off workers.”
For Lee, history suggests a different outcome. If the S&P 500 index rises at least 15% in a given year, which happened 28 times before 1950, half of the time it will rise an additional 10% the following year, and more than 70% of the time it will be positive, he said. said. He said. Also, historically when interest rates were between 3% and 5%, stock market valuations were similar to what they are now, suggesting that the rise is not excessive.
“People are trying to get too theoretical about the stock market,” Lee said. “Embracing chaos is a more correct way to approach the market.”
