Every reporter: Cai Ding Every editor: Tan Yuhan
On Friday, December 30, Eastern Time, the three major U.S. stock indexes collectively closed down. Affected by multiple unfavorable factors such as Federal Reserve aggressive interest rate hikes caused by concerns about economic recession, soaring inflation, conflicts between Russia and Ukraine, and tight supply chains, U.S. stocks this year recorded their worst annual performance since 2008.
The Dow closed down 73.55 points, or 0.22%, on Friday, at 33147.25 points; the Nasdaq fell 11.61 points, or 0.11%, at 10466.48 points; the S&P 500 index fell by 9.78 points, or 0.25%, at 3839.50 points. As of the close of trading on December 30, the Dow Jones Industrial Average had fallen 8.78% this year, the Nasdaq Composite Index had fallen 33.1%, and the S&P 500 Index had fallen 19.44%—all three major stock indexes had recorded their worst annual declines since the 2008 global financial crisis.
Image source: Wind
Global stock and bond markets will evaporate nearly US$40 trillion in 2022, twice as much as in 2008
Throughout 2022, the consumer discretionary sector of the US stock market fell by a cumulative 38%, the largest annual decline in history ; while the energy sector rose by 59%, the largest annual increase in history .
U.S. stocks late trading on Friday , technology stocks 's decline significantly narrowed, but in the end most ended lower. Although Tesla continued to rebound, under the influence of seven consecutive days of heavy losses as of Tuesday, finally recorded the largest annual decline in history. Under the attack of the major central banks led by the Federal Reserve, which aggressively raised interest rates, and central bank officials reiterated their tightening stance at the end of the year, European and American bonds fell sharply in 2022, with the annual government bond yield at least exceeding 200 basis points. U.S. debt had its worst annual performance on record. U.S. bond yield The upward pressure on growth stocks led by technology stocks has become the main driver of the decline in U.S. stocks throughout the year.
Tesla recorded its worst annual performance since its listing, falling 65.03% for the whole year (Photo source: Wind)
In the foreign exchange market, the US dollar continued to fall on Friday, and was close to the six-month low set two weeks ago. Throughout the year, the U.S. dollar index hit a 20-year high of 114.79 at the end of September. However, due to market expectations for the Fed's policy shift, the U.S. dollar index continued to fall in the fourth quarter of this year. However, in 2022, driven by the Federal Reserve's aggressive interest rate hikes and the slowdown in global economic growth, it still achieved its best annual performance since 2015.
The U.S. dollar index recorded its best annual line since 2015 (Photo source: Oriental Fortune)
Former Citigroup Global Foreign Exchange Jeffrey, co-founder and CEO of DeepMacro Young said in an interview with a reporter from " Daily Economic News ", "Since October this year, we have seen that if the market expects the Fed's policy to change, the U.S. dollar will weaken. Most currencies, including the euro , the pound, and the yen, have appreciated sharply in the past three months. However, I do not think the U.S. dollar will fall against other (major) currencies next year. Because after the Fed stops tightening, other major central banks will follow suit (because the Fed is more flexible than most central banks) Start tightening monetary policy early). Therefore, these non-U.S. currencies may not appreciate against the U.S. dollar next year because the interest rate differentials between them and the U.S. dollar will not widen. "
In 2022, in terms of evaporated market value, the global stock and bond markets will be more "tragic" than the 2008 global financial crisis: The value of nearly 40 trillion stocks and bonds around the world will evaporate this year, which is twice that of the whole of 2008 (after deducting inflation factors).
Image source: Bloomberg
In 2022, the United States experienced the highest inflation in 40 years, accompanied by a rapid rise in interest rates , and a relatively slow retracement of liquidity. As of the end of 2022, the Fed's balance sheet has shrunk by more than US$400 billion from its peak in April this year. However, there is still a long way to go before the Fed's balance sheet returns to pre-COVID-19 levels in early 2020.
Fed balance sheet trends (Image source: Bloomberg)
Strategist: 2023 will continue to be a challenging year, and investment models recommend overweight government bonds
In 2023, the market pays close attention to the Fed's policy turning signal.
The November core inflation data released on December 23 showed that the Fed's most "favored" inflation indicator recorded a slowdown for the fifth consecutive month - the U.S. PCE price index increased by 5.5% year-on-year in November, which was in line with market expectations. The previous value was 6.3% (revised from the initial value of 6%), which was the fifth consecutive month of slowdown and hit a new low since October 2021. Excluding food and energy prices, the core PCE price index 11 increased by 4.7% year-on-year, the market consensus expected 4.6%, and the previous value was 5%.
Image source: Bloomberg
In addition, the latest monthly survey of global fund managers released by Bank of America shows that investors' concerns about inflation are gradually weakening. 90% of respondents expect global inflation to decline in the next 12 months. The fund managers surveyed generally expect that the annual U.S. CPI rate will fall back to 4.2% in the next year, and federal funds interest rates will peak in the second quarter of next year, with a peak interest rate of 5%.
However, Federal Reserve Chairman Powell insisted that the decline in U.S. inflation and the stability of inflation expectations in the past two months are not "reasons for complacency."
He further emphasized: " The longer this round of high inflation lasts, the greater the likelihood that expectations will become entrenched. Indicators show that the economy will grow moderately this quarter. A restrictive policy stance may be necessary for a period of time. Labor supply and demand conditions will tend to balance . More evidence of falling inflation is needed. FOMC continues to believe that inflation risks tend to rise. "
Therefore, although the FOMC reduced the rate hike to 50 basis points after this month's meeting, the market still expects the Fed to continue to raise interest rates next year. According to CME Group's "Fed Watch", as of press time, the futures market believes that the Fed's current interest rate hike cycle will last at least until the meeting on March 22, 2023, when the federal funds rate will rise to a high in the range of 4.75% to 5.00%.
Image source: CME Group
Morgan Stanley predicts that the Federal Reserve will raise interest rates by 50 basis points early next year, and that interest rates will remain stable at 4.75%-5.00% for the remainder of next year. Barclays predicts that the Federal Reserve will raise interest rates by 50 basis points early next year and 25 basis points in March, respectively, and then suspend interest rate increases and keep interest rates at a peak of 5.0%-5.25% until the end of the year. Goldman Sachs Chief Economist Jan Hatzius predicts three interest rate hikes of 25 basis points in 2023, with the median interest rate in 2023 being between 5% and 5.25%.
Talking about the overall asset allocation ideas in 2023, Ye Shangzhi, chief strategist of First Shanghai Securities , said in an interview with "Daily Economic News" reporter WeChat, " Although the speed of the Fed's interest rate hikes has slowed down, we It is believed that interest rates will still be raised slowly. Next year is still not the time to discuss interest rate cuts, and given the current structural inflation problem in the United States, it is expected that the high interest rate environment will continue for some time. In addition, the recession of the U.S. economy is another concern at present, and the Russia-Ukraine conflict has not been completely resolved. Therefore, 2023 will still be full of challenges. In a year of war, it is recommended that you can deal with it with a more stable configuration. Among them, short-term U.S. Treasury bonds with a maturity of less than two years currently have yields above 4%, and the risk of short-term default on U.S. Treasury bonds is still controllable. In addition, under the background that the high interest rate environment will remain for some time, high-dividend stocks , which has stable business, is expected to continue to become the focus of the market. As for non-U.S. dollar currencies with high interest rates, since the U.S. dollar has begun to fall back from its highest level in 20 years, they can all be considered appropriately, and there may be opportunities to earn exchange rates and charge high interest rates. ”
Jeffrey Young told reporters, " Our asset allocation model recommends (in 2023) overweight long-term government bonds rather than stocks because the U.S. economy and inflation are slowing down at the same time, which will put pressure on corporate profits and directly increase the attractiveness of bonds (increase real yields). "
Daily Economic News
The November core inflation data released on December 23 showed that the Fed's most "favored" inflation indicator recorded a slowdown for the fifth consecutive month - the U.S. PCE price index increased by 5.5% year-on-year in November, which was in line with market expectations. The previous value was 6.3% (revised from the initial value of 6%), which was the fifth consecutive month of slowdown and hit a new low since October 2021. Excluding food and energy prices, the core PCE price index 11 increased by 4.7% year-on-year, the market consensus expected 4.6%, and the previous value was 5%.
Image source: Bloomberg
In addition, the latest monthly survey of global fund managers released by Bank of America shows that investors' concerns about inflation are gradually weakening. 90% of respondents expect global inflation to decline in the next 12 months. The fund managers surveyed generally expect that the annual U.S. CPI rate will fall back to 4.2% in the next year, and federal funds interest rates will peak in the second quarter of next year, with a peak interest rate of 5%.
However, Federal Reserve Chairman Powell insisted that the decline in U.S. inflation and the stability of inflation expectations in the past two months are not "reasons for complacency."
He further emphasized: " The longer this round of high inflation lasts, the greater the likelihood that expectations will become entrenched. Indicators show that the economy will grow moderately this quarter. A restrictive policy stance may be necessary for a period of time. Labor supply and demand conditions will tend to balance . More evidence of falling inflation is needed. FOMC continues to believe that inflation risks tend to rise. "
Therefore, although the FOMC reduced the rate hike to 50 basis points after this month's meeting, the market still expects the Fed to continue to raise interest rates next year. According to CME Group's "Fed Watch", as of press time, the futures market believes that the Fed's current interest rate hike cycle will last at least until the meeting on March 22, 2023, when the federal funds rate will rise to a high in the range of 4.75% to 5.00%.
Image source: CME Group
Morgan Stanley predicts that the Federal Reserve will raise interest rates by 50 basis points early next year, and that interest rates will remain stable at 4.75%-5.00% for the remainder of next year. Barclays predicts that the Federal Reserve will raise interest rates by 50 basis points early next year and 25 basis points in March, respectively, and then suspend interest rate increases and keep interest rates at a peak of 5.0%-5.25% until the end of the year. Goldman Sachs Chief Economist Jan Hatzius predicts three interest rate hikes of 25 basis points in 2023, with the median interest rate in 2023 being between 5% and 5.25%.
Talking about the overall asset allocation ideas in 2023, Ye Shangzhi, chief strategist of First Shanghai Securities , said in an interview with "Daily Economic News" reporter WeChat, " Although the speed of the Fed's interest rate hikes has slowed down, we It is believed that interest rates will still be raised slowly. Next year is still not the time to discuss interest rate cuts, and given the current structural inflation problem in the United States, it is expected that the high interest rate environment will continue for some time. In addition, the recession of the U.S. economy is another concern at present, and the Russia-Ukraine conflict has not been completely resolved. Therefore, 2023 will still be full of challenges. In a year of war, it is recommended that you can deal with it with a more stable configuration. Among them, short-term U.S. Treasury bonds with a maturity of less than two years currently have yields above 4%, and the risk of short-term default on U.S. Treasury bonds is still controllable. In addition, under the background that the high interest rate environment will remain for some time, high-dividend stocks , which has stable business, is expected to continue to become the focus of the market. As for non-U.S. dollar currencies with high interest rates, since the U.S. dollar has begun to fall back from its highest level in 20 years, they can all be considered appropriately, and there may be opportunities to earn exchange rates and charge high interest rates. ”
Jeffrey Young told reporters, " Our asset allocation model recommends (in 2023) overweight long-term government bonds rather than stocks because the U.S. economy and inflation are slowing down at the same time, which will put pressure on corporate profits and directly increase the attractiveness of bonds (increase real yields). "
Daily Economic News
