Market Comment - December

Beginning in 2023, the outlook for the economy was bleak, as investors expected that the rise in interest rates would put pressure on the economy, and recession calls dominated the financial media. During the second half of the year, the substantial increase in fiscal spending, together with an escalating interest in “Artificial Intelligence” investing, helped especially the US stock market to extend its gains, notably during the last two months of the year. Fiscal spending kept the global economy from falling into a recession, and in the end, the Bank of Japan continued its yield curve control, supporting global liquidity.

At the end of 2022, the average price target for the S&P 500 provided by 18 investment banks for 2023 was around 4,100, while the market managed to close at 4,770. Bill Miller once said, “100% of the information you have about any business reflects the past, and 100% of the value of that business depends on the future.” Witnessing a resilient global economy and falling inflation, economists are now able to paint a much rosier picture. Most investment bankers now have a year-end price target for the S&P 500 of around 5,100, matching bottom-up estimates by equity analysts for the index of USD 242.44, implying a 13% gain year over year. It looks like 100% of the information we have now is positive, leading to a positive outlook. Obviously, the current framework is vulnerable to disappointment.

The cyclical bear market that started in 2022 needs a classic ending, which would mean that we will see a panic sell-off during the current year. With high expectations, the odds for such an event are pretty good. Nevertheless, a negative surprise would build the base for a cyclical bull market that could last until the first quarter of 2026.

Longer term, our assessment remains the same. In the US, the post-2009 secular bull market is in the early stage of reversing. The secular trend determines the character of the primary trend, which is obviously important for investors. Currently, there are cyclical forces that help equities avoid entering a secular bear market. The US central bank wants to avoid a recession, some say, for political reasons. The fear of a renewed presidency by Donald Trump is on the rise. Some Fed members have clearly stated that they do not wish Donald Trump to be the next president. The ruling party never won a presidential election when a recession occurred during an election year. Both the government, through fiscal spending, and the Federal Reserve, by promising lower rates, seem to join forces to avert Donald Trump, whatever it takes. Any negative development in the economy will lead to extensive stimulative efforts by central banks, which in the end will turn out to be inflationary once again.