Wall Street optimists are betting on a soft landing delivering market gains

There isn’t much daylight in the Wall Street stack predictions which is predicted that 2023 will lead to a global economic decline and bad going to risky assets. But as the January trade picked up steam, a small cadre of optimists broke away from the consensus and betting on a soft landing would yield market gains.

David Kelly, the chief global strategist at JPMorgan Asset Management, is betting that inflation will continue to ease in 2023, helping the US economy avoid a recession. Ed Yardeni, the longtime stock strategist and founder of his namesake research firm, puts the odds of a soft landing at 60% based on strong economic data, strong consumers and indicators. to reduce price pressures.

“When you talk to people, they say it’s the worst of all possible worlds,” Kelly said in an interview. “No – inflation will decrease, unemployment will be low, we will get through the pandemic. The chances that the risk assets will be very good.

The nearly 20% drop in global stocks last year has most analysts and investors erring on the side of caution, with many predicting that historically high inflation is here to stay. and a recession is inevitable. Kelly, who thinks the Federal Reserve will end its historic hiking cycle after the March meeting and begin cutting rates in the fourth quarter, said pessimism could provide good opportunities to buy US value stocks and investment grade credit at discounted prices.

Yardeni, who does not rule out the possibility of a hard landing, sees opportunities in financial, industrial, energy and technology stocks that he says are now cheaper than last year. The bonds of such companies will also do well in 2023, he said.

“Optimists and pessimists agree that 2022 will be a terrible year for stocks and bonds but it won’t last forever,” Yardeni said in an interview. “The market has responded to the fact that inflation has become more consistent and the Fed more aggressive.”

Economic data published on Friday strengthened the case for optimism. other strong US jobs report showed hiring growth that exceeded expectations as wage gains slowed more than expected. Euro-area inflation returns a single digit for the first time since August, fueling hopes that the bloc’s worst consumer price hikes have risen.

Consecutive years are rare for the S&P 500, which has happened since only four times since 1928. But when it did, the drops in the second year were always deeper than the first, with an average drop of 24%. The average year-end target for the S&P 500 among strategists surveyed by Bloomberg in December was 4,078, which would imply a 6% gain for the index, although it was largely showing a big fall. which happened at the end of the year. In November, the average forecast for a reduction.

Research from Bespoke Investment Group suggests that year-end targets are typically about 5 percentage points in either direction. “We don’t usually make targets, just because we think they should be taken with a grain of salt,” says Bespoke cofounder Paul Hickey. “If there’s one thing I’ve learned through experience, it’s that when there’s such widespread agreement on anything, things often don’t work out as planned.”

The odds of a recession are fading in the credit market, where the gap between default swap spreads on high-grade companies and their junk counterparts has fallen more than 100 basis points since September. . Known as “compression” in market parlance, it focuses on less fear that a sharp economic downturn will leave the weakest credits vulnerable to default. However, the pace remains above pre-pandemic levels.

A Bank of America sentiment measure of strategists seems to support Kelly’s view that the market consensus is too pessimistic. It has fallen so much that it now marks a return of about 16% over the next 12 months. The most significant change that has occurred since last year, he said, is that prices have fallen, creating opportunities “all over the place.” Members of the S&P index are trading at about 17 times projected 12-month earnings, in line with the average reading this century.

“One resolution I made at the start of 2023 was to avoid unreasonable darkness,” Kelly wrote in a note. “A new year, like a new baby, should be welcomed with optimism.”

—With assistance from Jan-Patrick Barnert and Vildana Hajric.

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