There will be more equity market fallout. Historically, equity markets haven’t found a bottom while the Fed is in a tightening cycle. I see the NASDAQ index falling to 9,000 during Q1 2023 as: 1.) the Fed tightens further; 2.) weak 2023 earnings guidance is provided on Q4 EPS calls; and 3.) global recession combine to deliver a knockout blow to equities.
- More Fed tightening. The Fed will continue to tighten, even if only in 25 BPS increments combined with QT at a level below the $95 billion monthly cap. Rate hikes plus a continually shrinking monetary base will significantly tighten the economy and reduce asset valuations, including private and public company valuations. I don’t see the Fed pausing for a month or two and then taking the Fed Funds rate quickly back down to 1-2%. I don’t see that scenario even if unemployment were to go to 6-7%. The Fed will hold for an extended period of time before easing at a measured pace.
- I do see unemployment doubling from current levels (at least).
- Housing has much further to drop, especially when homeowners will be forced to sell their homes as credit dries up for some. I believe the Fed is “OK” with completely deflating the housing bubble as the central bank is 100% responsible for it (as it was responsible for all of the bubbles over the past several years).
- Yields will move higher in 2023, which is good news for Fixed Income.
- On the Equity front, make sure the companies you own throw off high margin free cash flow. Be sure those companies don’t have significant debt maturities over the next year or two as those rollovers will be painful. For some (high yield), those rollovers may not happen. Chapter 11 will happen instead.
- Weak 2023 guidance. CEOs are not going to stick their necks out during January/February earnings calls. Initial 2023 guidance will be very conservative given that CEOs have limited visibility.
- Recession. Pressure continues to build on consumers as savings dwindle and credit balances mount. Real world prices have increased far more than what is reported in CPI. Energy and Food are the two basic expense categories that the average consumer incurs and those expenses are higher than what may be found in the CPI reports. Anyone who has been to the grocery store will attest to this fact, (especially as it relates to food staples such as meat, fish, poultry/eggs, dairy and bread). This inflation-driven recession was an easy call.