2023 Will Be Ruled by Stagflation, Placing Stocks in Danger

Investors believe that stagflation will be the biggest threat to the world economy in 2023, and that hopes for a market rebound in the wake of this year’s terrible selloff are unwarranted. Nearly half of the 388 people who participated in the most recent MLIV Pulse survey predicted that the world will experience continued weak growth and high inflation in 2019. A deflationary recession is the second-likeliest scenario, while an economic recovery marked by excessive inflation is the least likely.

The results indicate that risk assets will face another difficult year following the greatest stock market decline since the global financial crisis was caused by central bank tightening, soaring inflation, and the impact of Russia’s invasion of Ukraine. Over 60% of survey respondents believed investors worldwide are still overly enthusiastic on asset prices despite this gloomy backdrop and the fourth quarter rally in stock prices.

Nicole Kornitzer, the $6 billion Buffalo International Fund portfolio manager at Kornitzer Capital Management Inc. in Paris, predicted that the coming year will continue to be challenging. “Stagflation is the current forecast, without a doubt.”

In the meanwhile, over 60% of participants anticipate that the dollar would lose more ground in a month. In contrast, almost half of those surveyed last month predicted they would have a long position in the dollar going into the Federal Reserve meeting in November. This year, the strength of the dollar has hurt a number of asset classes, including emerging market stocks and foreign currencies like the euro. There may be some opportunities in 2023, which is already predicted to be a down year, thanks to the weakening currency.

According to Kornitzer, the dollar will likely lose strength throughout 2023. Maybe not significantly, but the trend will undoubtedly be negative. The main drivers of the currency will be a US recession and the movement of interest rates, she predicted.

As we get into 2023 and rates stay higher for longer, growth is expected to be more impeded. Chair Jerome Powell has already hinted at this regime, so all eyes are on the Fed. In addition, China’s tough Covid Zero policy poses a risk to the world economy as Covid cases remain at record highs and protests against the country’s Covid curbs continue to grow.

More than half of those polled predicted that the S&P 500 will end 2023 within a 10% range of lower or higher levels. That is in line with forecasts on Wall Street, according to strategists at Goldman Sachs Group Inc., Morgan Stanley, and Bank of America Corp., who anticipate that the S&P 500 will be largely unchanged in a year. They all anticipate that declining earnings will have an impact on stock performance.

Analysts would need to lower their earnings projections, according to Anneka Treon, managing director at Van Lanschot Kempen in Amsterdam, whose company has a conservative outlook on stocks through 2023. “We anticipate that the US will only be able to demonstrate modest growth, and that China will no longer be able to realize its own aspirations.”

Despite all the doom and gloom, survey participants believed US inflation was more likely to dip below 3% than surpass 10% in 2023, suggesting some relief toward the year’s end. That would be good news for Fed officials, who had already indicated they were considering reducing their December boost to 50 basis points in order to reduce the danger of overtightening.

The MLIV survey respondents perceive a possibility to buy long-term bonds and tech stocks, among other topics, as chances. Due to the steep increase in interest rates this year, both asset classes have taken a beating.

Other possible dangers for 2023 include changes to the property markets in the UK and Canada, where respondents believe there is a higher chance of a 20% crash there than elsewhere. Some prospective buyers are being driven off the market by the increase in borrowing costs, which is fueling predictions of a decrease in home values.

The majority of respondents downplayed the likelihood of escalating geopolitical conflicts in 2019—for instance, between NATO and Russia, China and Taiwan, and NATO and the United States.

Ipek Ozkardeskaya, a senior analyst at Swissquote, predicted that “the increasing rates story will be driven by the first half of 2023.” “However, we expect the market narrative to change toward “poor growth and recession” around the third and fourth quarters of next year.”