As is customary in the second half of the fourth quarter, market strategists and economists from across Wall Street released year-ahead forecasts outlining the most important trades and themes in the markets for the coming year.
The latest review comes courtesy of Bank of America’s TJ Thornton and a slew of other in-house strategists and economists, who on Monday shared a breakdown of the top 10 macro themes from Bank of America Global Research, with each theme attributed to Bank of America strategists or economists. who suggested it.
Some of the biggest themes for markets include the idea that markets won’t turn on “risk-on” until mid-year, that a global recession is all but inevitable, and the idea that the reopening of China’s economy after years of lockdowns inspired by COVID-19 could be huge implications for commodities, especially industrial metals.
Markets will turn on risk in mid-2023
As the recession and credit shocks weigh on risk assets, investors should use long bonds, especially 30-year Treasuries, in the first half of 2023. The idea that the S&P 500 typically bottoms out six months before a recession ends suggests that a recovery will begin around the middle of the year. With BofA expecting U.S. stocks to hit new lows in the first half of next year, chief investment strategist Michael Hartnett reiterated his oft-repeated recommendation for equity investors: “Bite at 3600 S&P, bite at 3300, lift at 3000.”
Recession is almost inevitable in the US, the Eurozone and the UK
Expect a mild recession in the US in the first half of 2023, with the risk of starting later in the year. According to Ethan Harris, head of global economic research at BofA, Europe is likely to experience a recession starting this winter, followed by a shallow recovery.
Expect rates to drop by the end of the year
BofA expects the Treasury yield curve to invert while interest rate volatility will fall. Credit strategists estimate that the yield on two-year and 10-year bonds will be 3.25% by the end of the year. According to BofA rates strategist Mark Cabana, sectors that were hit by the rate hike in 2022 may benefit in 2023.
China’s reopening could be “difficult” until late 2023
“We expect a gradual reopening of China starting now with most of the curbs removed [in second half of 2023,” said BofA’s Helen Qiao, chief economist for Greater China. BofA expects China’s economy to grow by 5.5% next year, which is higher than the consensus on Wall Street.
EM should produce strong returns after volatile 2023
“Once inflation and rates peak in the U.S. and China reopens, the outlook for [emerging markets] should be more favorable,” said David Hauner, head of EM cross-asset strategy.
Industrial metals gain momentum
Copper prices in particular could rise by 20% next year. “Recessions in key markets are a headwind, but the reopening of China, the peak value of the dollar and especially the acceleration of investment in renewable resources more than offset these negative factors,” said Michael Widmer, senior metals strategist.
Oil prices could be higher for much longer
“Russian sanctions, low oil inventories, the reopening of China and OPEC ready to cut production if demand weakens keep energy prices high. Brent should average $100 a barrel in 2023 and rise to $110 in the second half of the year,” said Francisco Blanch, head of global commodities, equity derivatives and quantitative investment strategies at the fund.
Reshoring to drive capital spending
A strong labor market, U.S.-China decoupling and higher environmental, social and governance standards should keep capital spending strong, said Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Securities.
The consumer gets some price relief
Inflation is likely to moderate next year, but some workers are likely to lose their jobs as the U.S. unemployment rate peaks at 5.5% in the first quarter of 2024, according to Michael Gapen, chief U.S. economist. at BofA.
The end of Fed hikes means a more positive backdrop for credit
Investment-grade lending should increase next year as a weaker growth outlook and higher interest rates lead management to shift its priority to debt reduction. US investment grade strategist Yuri Seliger sees investment grade credit total returns of around 9% in 2023.
Stocks rose sharply on Monday, with the Dow Jones DJIA industrial average,
jumped nearly 530 points, or 1.6%, while the S&P 500 SPX,
increased by 1.4%. The S&P 500 index has fallen by more than 16% this year.