Equities

The most important question investors need to answer is whether this is the right time to shift the portfolio to a more aggressive and cyclical stance now that the end of the hiking cycle is in sight. To answer this question, we review the most recent macroeconomic, geopolitical, and equity market developments, and do our best to separate facts and data from sentiment and conjecture. We conclude that there are many challenges ahead and equities are not in a clear yet. We recommend investors add small positions in areas of the market that benefit from rate stabilization while maintaining an overall defensive stance.

China's reopening is much more positive for the Chinese economy than it is for the rest of the world, as it will boost its domestic service sector activity and consumer spending much more than the industrial economy. A slowdown in Chinese industrial activity will put downward pressure on its demand for raw materials and energy, helping the world avoid another spike in inflation. Upgrade Macau casinos to overweight as the key beneficiaries of reopening. Off-shore TMT and bank shares face structural headwinds.

This Friday, January 13th, will mark the beginning of the Q4-2022 earnings season, with the biggest banks, such as JPM, Bank of America, Wells Fargo, and Citigroup reporting quarterly earnings. This note will review consensus expectations, revisit our own (correct) earnings predictions, and lay out a roadmap for 2023.

Today we are publishing a charts-only report focused on the key macroeconomic data as well as each GICS1 S&P 500 sector. Many of the charts are self-explanatory; to some we have added a short commentary. The charts cover macro, valuations, fundamentals, technicals, and the uses of cash. Our goal is to equip you with all the data you need to make investment decisions in these sectors.

Special Report

For the final publication of 2022, I am sending you a Special Report, The 2024 Election: A "Way Too Soon" Forecast penned by Chief US Political Strategist Matt Gertken. Matt argues that the Democratic Party is slightly favored to retain the White House in 2024 unless there is a recession. Since recession odds are fairly high, Republicans have a nearly even chance of winning. But they must also resolve their internal leadership struggle, which will be difficult.

On October 5th, we published an Insight Report “When Good News Is Bad News,” in which we called the beginning of the next bear market rally, which fit perfectly into our “flat and down” call for the market. Today, we are calling the end of this rally. We expect equities to make a new leg down in the first half of 2023, going as low as 3,000-3,200. We discuss the price target in detail in our 2023 Outlook.

Today we are publishing a charts-only report focused on the S&P 500, Cyclicals/Defensives, Growth/Value, and Small/Large equity styles. Many of the charts are self-explanatory; to some we have added a short commentary. The charts cover macro, valuations, fundamentals, technicals, and the uses of cash. Our goal is to equip you with all the data you need to make investment decisions along these style dimensions.

Special Report

2023 will be another challenging year for the US equity market, characterized by the Fed’s battle with inflation, slowing economic growth, and earnings contraction. The S&P 500 is likely to reach new lows in the first half of the year falling as much as 20-25%, only to rebound sharply in the second half, once all the bad news is priced in.

Special Report

Such high concentration obstructs portfolio diversification and obscures the valuations and performance of the more diverse constituents in the group. It also increases stock selection risk, making the job of asset allocators much more difficult.

Airlines have staged an impressive recovery this year, exceeding all expectations. While companies are optimistic, we are cautious. Just as pent-up demand for travel will fade, headwinds from slowing growth and high inflation will intensify. While it is highly likely that Airlines will continue to rally into the yearend, we will stick to our underweight as our three-to-six-month outlook remains negative.