History shows 2022, 2023 stock returns likely after 2022, Fundstrat says

Historical data shows that the U.S. stock market is likely to return 20% or more this year after the three major indexes closed 2022 with their worst annual losses since 2008, according to Fundstrat Global Advisors.

Tom Lee, head of research at Fundstrat, said that stock investors will see a more positive year than a straight year after the poor performance of stocks in the previous year.

In 19 cases of negative S&P 500 SPX index,
According to data from Fundstrat, the year since 1950, the return year, more than half of those years, the large-cap index has gained more than 20%. Only two of those years were followed by a straight year of returns ranging from 5% to minus 5%.

“Stocks are 5 times more likely to rise 20% than to be flat, and more than half of the patterns are gains of more than 20%,” Lee said in a note on Friday.

Moreover, these probabilities are much higher than in normal years. In all 73 years since 1950, there is only a 27% chance that the S&P 500 will finish with a gain of more than 20%, compared to a 53% chance in subsequent negative years.

To see: No one knows which stocks will fuel the next bull market, but they likely won’t win the bear market.

Here are three possible catalysts that could drive stocks to 20% gains in 2023:

Global “disinflation” is underway

Lee and his team believe that US inflation will beat the Federal Reserve and markets’ consensus by a wide margin in 2023.

Economists polled by the Dow Jones expect the December inflation report, due out next Thursday morning, to show headline inflation unchanged from the previous month, or 6.5% year-on-year. The key price measure, which cuts volatile food and fuel costs, is expected to rise 0.3% from November, or 5.7% year-on-year.

However, Lee thinks the upcoming CPI report could show core CPI growth as low as 0.1% in December, which would indicate a significant slowdown in the pace of inflation, leaving the three-month seasonally adjusted annual rate (3M SAAR) around 2%. . “We think it would be a big positive surprise,” Lee said.

As a result, Lee and his team believe this could pave the way for the Fed to lower its rate hike path and even change its view that the benchmark rate should remain “higher for a longer period of time.” Fed funds futures traders now see a 74% chance of a 25 basis point hike at the next policy meeting, which ends on February 1, and another 66% chance in March, which would push the terminal rate to mid-4.75-5%. -year, according to the CME FedWatch tool.

To see: ‘Old habits die hard’: Traders take second look at 5%-plus US interest rate until March

However, the central bank hinted at its December meeting last year that the final interest rate could reach 5.25% this year, but does not expect a rate cut until the end of this year.

Wage increases are set to slow

“Despite what appear to be ‘strong’ job markets, leading indicators are already showing a slowdown in wage growth,” he said.

Friday’s employment report showed wage growth was less than expected in December, signaling that inflationary pressures may ease. Average hourly earnings rose 0.3% in the month and were up 4.6% from a year ago, slightly less than expected and down 0.4% from a month earlier.

However, wage growth, while slowing in December, was still better than expected, a sign that the labor market remains strong even as the economy faces increased headwinds from the Federal Reserve. The unemployment rate decreased from 3.6% to 3.5%.

To see: A Goldilocks scenario? Slower wage growth for workers could help the US economy avoid a recession.

Equity (VIX) and bond volatility (MOVE) will fall sharply

According to Lee and his team, stock and bond market volatility is expected to fall sharply in 2023 in response to lower inflation and a resulting less hawkish Fed. “Our analysis shows that this drop in the VIX is a big driver of equity returns, and it will contribute to more than 20% gains in stocks.”

CBOE Volatility Index VIX,
The ICE Bank of America Merrill Lynch MOVE Index, a measure of implied bond market volatility, was last at 119.53 at 9:03 p.m. Friday.

U.S. stocks rose on Friday after the December jobs report boosted hopes that the Fed’s monetary policy is finally starting to have some effect on the economy. Dow Jones Industrial Average DJIA,
rose nearly 700 points, or 2.1%, to 33,629. S&P 500 2.3%, Nasdaq Composite COMP,
It increased by 2.6%.

To see: Is There a Stock Market Revival in 2023 After the 2022 Sell-Off? What does history say about back-to-back lost years?

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