Trading Range No More: Dark Clouds Loom Over Stock Markets in 2023

Dear subscribers,

We previously projected a trading range for the stock markets in 2023, but recent events have brought much worse scenarios to the table. Despite some significant events this past week, including the Federal Reserve raising rates and Credit Suisse being taken over by rival UBS Group, the market has been lackluster. The S&P 500 index has bounced between 3700 and 4200 for the past few months, and investors are not showing much enthusiasm for stocks.

The economy is slowing, interest rates are rising, inflation is persistent, and earnings estimates are decreasing, along with a series of rolling crises. All of these factors have kept a lid on big gains, says Wolfe Research Chief Investment Strategist Chris Senyek. Even if investors could get motivated by slowing inflation and a potential end to the Fed's cycle of rate hikes, more potential crises loom.

Commercial real estate and private equity are on Senyek's watch list as both are leveraged bets in a rising-rate environment. Meanwhile, debt and liquidity crises do not resolve quickly, according to Que Nguyen, Research Affiliates' Chief Investment Officer for Equities. It is a crisis of the Fed's making, and short-term interest rates being higher than long-term rates is a disaster for smaller banks that borrow at short-term rates.

The mood is grim, and four strategists offer similar advice: Stay defensive, hold a little more cash, and stick to quality stocks with solid balance sheets and growth that doesn't depend on the larger economy. Small-cap stocks are cheaper than usual, but investors should avoid small-cap bank stocks. Most of all, don't get too excited about the next rally on Wall Street.

Stocks can go sideways for long periods, and go down, but the one thing that hasn't been mentioned is going up. We will continue to monitor the situation and keep you informed.

Best regards,

The Financial Newsletter Team