What Could Surprise Us in 2023?
Our outlook for 2023 explains our view that even as growth weakens throughout the year, markets will probably have a better year than they did in 2022. But what might surprise us? Here are three scenarios we think are realistic, but which aren’t part of our base case.
1. China and Europe will materially outperform. China’s surprise reopening after three years of stringent Covid-19 containment policies will not only provide a tailwind to domestic Chinese economic growth, but also to many global companies that are exposed to spending by Chinese households. Europe now has a surplus of natural gas after a keen focus on building storage in the fall, the rapid construction of LNG import facilities in Germany, and a very mild winter. China is the third-largest revenue source for European companies, so a reopening should provide an earnings tailwind.
2. Forget a hard landing or soft landing. No landing at all in 2023. Many outlooks expect equity markets to have a tough first half of 2023 as they anticipate a U.S. recession (a hard landing) by the second half of the year. Others believe the Federal Reserve can stop hiking rates because price inflation and the labor market will settle in a more balanced place (a soft landing). But there is a case to be made for no landing at all.
The broad labor market has shown no signs of weakness. Initial jobless claims are still stable at very low levels while the November quits rate, a good indicator of how comfortable workers feel about finding a new job, rose. This strength in the labor market comes at a time when price inflation is falling, meaning that real income for workers is rising, which could support more spending and would encourage companies to continue hiring. This would keep upward pressure on wages and would incentivize the Fed to keep hiking rates through the balance of the year.
3. Wall Street: Don’t call it a comeback. The industries that felt the impacts of higher rates most acutely last year were finance and real estate. Initial public offerings, high yield debt issuance, mergers and acquisitions, mortgage applications and home sales all collapsed at their fastest rate since the Global Financial Crisis. Higher financing costs are meant to slow down activity, but the rate of change in interest rates also had a material impact. Businesses, bankers and prospective homeowners all paused to see where the ceiling on interest rates was before borrowing and dealmaking. Even though rates will remain at a higher level in 2023, their stability will help spur more activity in interest-rate-sensitive sectors.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
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privatebank.jpmorgan.com/los-angeles
