A smooth sea never made a skilled sailor. This week we help investors navigate cross currents in the market, interpret 4Q earnings to suggest a difficult environment for U.S. companies and present the bull case for European banks.
Whether it was COVID, inflation, or rate hikes, all that mattered for the past three years was the macro environment. Assuming central banks are successful in taming inflation, micro factors matter once more. However, U.S. Equity & Quantitative Strategist Savita Subramanian and Global Economist Ethan Harris warn of cross currents likely to complicate 2023, resulting in outcomes not found in a classic market cycle playbook. Unlike in a typical economic slowdown, we should see higher capex spending given underinvestment in infrastructure, peak globalization and tight labor driving automation spend. Similarly, consumer and corporate balance sheets look in far better shape than ahead of past recessions, with leverage still near record lows. Although the picture for government debt is much different. Also, layoffs haven’t been widespread with white collar workers (Wall St/Tech) disproportionately impacted compared to blue collar workers. And don’t be surprised if oil companies and renewables outperform this year, despite being negatively correlated in the past.