The WSE and Wall Street are waiting for inflation to drop. Will there be a breakthrough in 2023?

Dov Herman

2 years ago

2022 will go down in history as a year of volatility where central banks clipped the wings of most markets. Although the FED announces further increases, the readings from the US economy suggest that the peak of inflation in the US is behind us. According to Tomasz Hońdo, an analyst at Quercus TFI SA, in 2023 there should be more and more arguments for growth, and Wall Street should become bullish again.

Wall Street ends 2022 with serious declines, the apogee of which should fall in the first quarter of 2023.
The shares of the American BigTech have not been protected from declines, but in the next year there should be gradually more upward arguments
Where to look for increases in 2023, and which markets will remain under bear dominance?
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Wall Street is waiting for inflation to drop

The past year can be summarized as a time of intensified fight against inflation, which is why the upcoming disinflation is very good news, although its price may be the recession forecast for 2023. In Poland, the CPI index reached its current maximum in October at 17.9%, although in September it retreated by 0.7 percentage points. percent, so market observers have doubts whether this is the end of the fastest price increase in our country since December 1996. Opposite sentiment prevails overseas, where commentators point out that CPI inflation in America reached its peak in June at the level of 9 percent. year on year and since then it has been systematically decreasing, which in the long term should support the easing of monetary policy by the FED.
Changes in the SP500 index Source: Qnews.pl, S&P Global, FRED. Data for XII to December 20. – Historically, disinflation is a positive phenomenon. We looked at six historical cases, starting in the 1950s, where CPI inflation peaked above the 7% threshold. While not all cases have led to a bull market on Wall Street, the average path of the S&P 500 is clearly upward. Eighteen months after the peak of inflation, the index averaged 16 percent. higher – wrote Tomasz Hońdo, an analyst at Quercus TFI SA in his analysis

GPW makes plans for a bull market in 2023

The Polish stock exchange cannot consider this year a successful one. Compared to January, the WIG20 index fell by over 20%, the mWIG40 index by 24%, and the sWIG80 index will end the year ca. 15% below. Although it does not sound optimistic, it may be an opportunity to buy underinvested shares of companies whose price to forecasted earnings ratio (forward P/E) has reached near historical lows. – Despite the autumn rebound [na GPW], P/E is still very low – it is currently around 7.2. This is still a value close to historical lows. With such low valuations, it has historically been profitable to accumulate Polish shares, regardless of other issues. While company profits are likely to fall next year, which in turn would drive P/E up, the conclusions about the low level of valuations are also confirmed by other metrics such as price to book value (P /BV) – explains the Quercus TFI SA expert
Source: Qnews.pl, MSCI. Anyway, low valuations are not the only argument of the bulls on the WSE. Added to this is the so-called the Kitchin cycle, which will reach its theoretical bottom in the first quarter of 2023, after which it will enter the growth phase. And it must be admitted that the last two years have perfectly matched the rhythm dictated by this cycle.

Market moods point to a crisis

The end of 2022 is characterized by pessimism visible at every step. This is a good sign, as the bad news should already be partially in prices, while the good news is gaining in importance and may cause local euphoria and rallies. The Bank of America survey conducted among fund managers shows that while a year ago they did not perceive most of the serious threats, now the situation is quite different – they are strongly underweight in shares and at most with the autumn rebound on the stock exchanges they are only starting to “overweight” – says Tomasz Hońdo.
Source: Qnews.pl, S&P Global, Bank of America Global Fund Manager Survey. From the same poll comes widespread fear of a recession. A similar picture can be seen in the CNBC survey among “millionaire investors” who fear a bear market comparable to the financial crisis of 2008. – Equally agree about the difficult next year is also the majority of Wall Street analysts, who were rather optimistic a year ago. Such cold moods can be paradoxically a good sign, because this time the threats are well recognized – explains the expert.

Where to look for further declines?

Undoubtedly, what is currently happening with the shares of the most recognizable companies from Wall Street is only a foretaste of what awaits investors next year. The market has realized that the predicted and crisis-ridden 2023 is knocking on the door, and the global economic situation is getting more and more tense. – Already at the beginning of 2022, we saw the first similarities in the behavior of the S&P 500 with the memorable, devastating bear market of 2008, and with each subsequent month the similarity grew. Also, the latest movements of the S&P 500 are still in line with this bearish pattern, which would imply that the most dramatic phase of the bear market awaits us already in the first quarter of 2023, argues the analyst.
Source: Qnews.pl, S&P Global. Data until December 20. Although you cannot step into the same river twice, and 2008 is a thing of the past, the impetus for the escalation of the bear market was the collapse of Lehman Brothers and the crisis of confidence in the banking sector. Currently, there is no analogous impulse with a similar power of destruction, but Morgan Stanley predicts that next year American corporations may face a recessionary decline in profits on a scale not seen since 2008. Noteworthy is the ongoing sell-off of shares in Apple, Amazon, Google and Meta, which are entering 2023, with the prospect of further sales, which already now ranges from nearly 30 to even 65% over the course of 12 months. The article was based on the analysis of Tomasz Hońdo, an analyst at Quercus TFI SA with the CFA title. The original form can be found at qnews.pl.
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