Market Watch: Outlook 2023 – When will stock markets bottom?

Business Editor-at-Large Liam Dann talks to Pie Funds founder and CIO Mike Taylor about what to expect in 2023. Video / NZ Herald

The economy is expected to be tougher next year and recession risk high, but that doesn’t necessarily mean there’s doom and gloom for investors.

In fact, history suggests it is likely
becoming a better year for stock markets, which typically bottom about six months before the broader economy, says Mike Taylor, founder and chief investment officer of Pie Funds.

“So 2022 was not a good year. It wasn’t the worst year on record. But it’s up there,” he said.

At the time of filming, markets were down 15 to 20 percent for the S&P 500 and nearly 30 percent for the Nasdaq, Taylor said.

In relative terms, the NZX50 is in better shape – down around 10 percent year-to-date.

For 2023, the rate-hike cycle and a mild recession are already priced into stocks by that point, he said.

“What isn’t priced into stocks is a financial disaster caused by tightening or a severe recession, so either of those two scenarios could happen,” he said.

But while there could well be more downside for investors in the coming months, the end was in sight.

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“The likely course is that the Fed will talk hard for a few more months. They’re going to want to see more doldrums in the job market before they let up, and I think that’s going to put more pressure on stocks early in the year.”

In addition, we were beginning to see an economic slowdown, he said.

“That’s coming and will be reflected in corporate earnings, which are likely to be a bit disappointing in the first three to six months of next year,” he said.

This scenario means there is a good chance that stock markets would bottom in the first half of 2023, he said.

“Let’s not forget that this was an inflation-led cycle. Once that’s under control, the Fed will be able to ease rates a bit further, which will be beneficial for equities.”

While they may appear to be a more complex and specialized area of ​​the financial markets, bond investments make up a significant portion of many KiwiSaver accounts.

Bonds had a terrible year in 2022 as interest rates accelerated above market expectations, Taylor said.

In fact, it was the worst year in history for US Treasuries, according to data going back to the 19th century.

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Typically, after such a slump, the following year or the year after will be a very strong year, Taylor said.

That would bode well for underlying returns in balanced portfolios.

Mike Taylor, Founder and Chief Investment Officer at Pie Funds. Photo / NZME

Meanwhile, a sharp recession would likely prompt the Federal Reserve to aggressively cut interest rates, he said.

“Inflation becomes deflation. Then you would see bond yields fall, both on the short and long ends of the curve, which will be very beneficial for Treasuries. And who knows, if interest rates go back to 1 percent, it could be a bonanza year for bonds.”

Much depends on when and how severe a recession hits.

The Reserve Bank has forecast a recession in the second half of 2023, but Taylor thinks it could hit earlier.

“Things are definitely slowing down but there are still more jobs than unemployed. So it’s not going to be like we’ll feel the bite of a recession until that balance tips a bit,” he said.

But mortgage rates had risen sharply. More and more people rolled from low interest rates of 2-3 percent to interest rates above 6 percent.

“That will limit household spending. So I would say that there is a high probability that New Zealand will enter recession in the second quarter of next year – between March and June.”

The good news for investors was that historically, in almost every recession, the stock market bottomed out about six months before the real economy.

“So if you think the real economy is going to bottom in the second half of next year, that would mean stock markets will bottom in the first half,” Taylor said.

“I know this seems odd and somewhat counterintuitive, but that’s what markets are doing. They’re always looking for a light, and everyone wants to try to find the reason, so that seems to be happening.”

– The Market Watch video show is produced in partnership with Pie Funds.