I hope the entire Real Money community had a relaxing and joyous Turkey Day with friends and family. We are now in the homestretch here in 2022. Here is hoping we get some sort of Santa Claus rally sometime in December to close out on a high note for what has been a challenging and somewhat putrid year for investors.
I am optimistic that 2023 will produce better investment returns than 2022. Albeit that is a laughably low bar given the Nasdaq is off by more than a quarter this year while the S&P 500 is off approximately 15%. Unfortunately, I think the economy is heading straight into a recession as the New Year approaches. The question is how long and how deep this economic contraction will end up being in my opinion.
I base this view on several key factors. First, the consumer which accounts for 70% of overall economic activity, is completely tapped out. The National Retail Federation projected this week that the average American consumer will shell out 15% less than last year for holiday gifts and presents, and this is before accounting for inflation.
It is hard to blame the consumer for pulling back as we head into 2023. Their buying power has been eroded by some 6% since the start of 2021, thanks to the highest inflation levels since the early 80s. The personal savings rate is down to the lowest levels since 2008 and interest rates on consumer based debt are rising.
The only real bright spot for the consumer is the jobs market. However, given the recent notable pick up of layoff notices, that strength is starting to crack. While I expect inflation to come down markedly in the first half of 2023, I also believe the unemployment rate will start to tick up by the second quarter of next year. Therefore, the so called 'misery index' will remain at a high level in 2023.
Nor should we count on manufacturing and industrial activity to save the day. Recent readings on rail traffic are showing falling activity compared to the same period a year ago. In addition, earlier this week the U.S. PMI reading fell to 46.2. A level that is deep in recession territory and this was one of the steepest monthly drops since the Financial Crisis a decade and a half ago.
Also, the yield curve has inverted. While this doesn't always signal the start of a recession, it has a pretty decent track record of doing so. The yield curve (the differential between interest rates on the 2-year and 10-year treasuries) recently inverted to its highest level since 1982. Not coincidentally to a period where the Federal Reserve was ratcheting up interest rates to get rampant inflation under control.
Those efforts eventually bore fruit, but not before putting the economy is a nasty double dip recession that pushed the unemployment rate past the 10% level. While I don't see history repeating to that degree, given the recent sharp spike in Fed Funds rates, unemployment hitting 5% in 2023 seems a decent bet.
In short, economic, profit, revenue and job growth is going to be hard to come by in 2023. In Monday's column, I will take a shot at profiling a few names that should manage to buck these headwinds to deliver acceptable growth levels in the coming year.
