Barron’s Weekend Summary: After a selloff in the first half of 2023, equities could rebound as investors anticipate a return to economic growth, market strategists say
Cover Story:
-After a selloff in the first half of 2023, equities could rebound as investors anticipate a return to economic growth, market strategists say. Stocks could continue sliding as 2023 unfolds, particularly if the Fed’s interest-rate hikes push the economy into a recession. Yet, a more modest economic slowdown might be enough to reduce price growth to a level near the central bank’s annual target of 2%. Once the Fed pauses its tightening, the gloom shrouding Wall Street could lift, setting the stage for a stock market rally. Based on the average of the predictions of eight investment strategists recently canvassed by Barron’s, the S&P 500 SPX -1.11% could end 2023 at 4233, 9% above its current level.
Interview:
-Stephanie Lynch, co-founder of Global Endowment Management, a Charlotte, N.C.–based firm that oversees $11.2B for endowments, foundations, and nonprofits. Global Endowment Management, or GEM, acts as an outsourced chief investment officer, or OCIO, for clients, including the Rhode Island School of Design, the New York Blood Center, and the Woods Hole Oceanographic Institution. Barron’s recently spoke with Lynch about the challenges and opportunities facing endowments now that higher inflation and interest rates, and greater market volatility, have put an end to the easy money made during the bull market’s historic run.
Tech Trader:
-With just two weeks left in 2022, the NASDAQ Composite is off 32%, the worst year for tech since a 40% drop in 2008. Dozens of former highfliers are down 50%, 70%, even 90%. The IPO market is closed—new issue proceeds are down 97% in 2022. Crypto is in tatters. The ad market is soft, cloud computing is decelerating, enterprise tech spending is slowing, and the PC market has come unglued. Meanwhile, what sales there are have been hurt by the strong dollar. Meanwhile, the biggest problem of all is that the Federal Reserve keeps ratcheting up rates to fight inflation. Higher rates are poison to tech stocks, because earnings far into the future are less valuable as rates rise. And this year, the yield on the two-year Treasury note has climbed from 0.7% to 4.2%.
The Trader:
-The Federal Reserve may be making a huge mistake, and one that could mean another difficult year for the stock market in 2023. Those concerns came to the fore over the past week, following the Federal Open Market Committee’s December meeting. The Fed didn’t do anything to surprise the market as it raised the federal-funds rate by a half-point, just as everyone expected, and suggested a terminal rate of just over 5%, a level investors had slowly come around to. But the dot plot reflected the Fed’s belief that rates would have to go high and stay high, while Chairman Jerome Powell continued to strike a hawkish tone. The selling started immediately and continued through Friday. When it was finished, the S&P 500 had fallen 2.1% for the week, the Dow Jones Industrial Average fell 1.7%, and the NASDAQ dropped 2.7%. It was the second straight week that all three indexes notched a loss.
-Real estate investment trusts have not been the place to be in 2022—and while next year shouldn’t be worse, it might not be all that much better. Some REIT sectors will have a tougher time pulling that off than others. Some office REITs, in particular, could be forced to lower dividends as companies deal with changes in how—and where—people work and vacancies remain high, Citigroup’s Nicholas Joseph writes. Instead, he prefers REITs in sectors that address needs, not wants, and benefit from secular trends, including industrials, data centers, cell towers, and self-storage, among others, while underweighting the aforementioned offices and diversified REITs. He’s also underweight malls, due to continued problems faced by retailers, among other issues. Still, some mall REITs look attractive: Simon Property Group SPG, which could hold up better than most of its peers due to its exposure to luxury brands. Compass Point Research & Trading analyst Floris van Dijkum notes that luxury retailers are likely to hold up better in the months ahead if the economy slows because the rich will likely remain rich, while luxury brands look ready to expand from the coasts into middle America.
Features:
-Apple enters 2023 facing production issues in China, concerns about consumer spending, and a laundry list of long-term projects. Nevertheless, Apple stock is still Evercore ISI’s top “set and forget” pick within the tech-hardware space heading into 2023. “While we understand investors are concerned about the near-term iPhone outlook given manufacturing disruption issues in China, we see any headwinds as transitory and investors should remain focused on the long-term opportunity,” Evercore’s Amit Daryanani wrote in a Friday note to clients. In 2023, the smartphone giant has an opportunity to make progress on its “moonshot” endeavors, he continued.
-Barron’s features an article about what to eat, and where to invest, to reduce Alzheimer’s. First where to invest: Biogen has launched a new Alzheimer’s drug, lecanemab. But it’s not the only good news on the dementia front. Some might even say we’re making as much progress, or more, outside the drug labs as inside. Walking, crosswords, and meditation also lower your risk of dementia. And some fresh research from Rush University Medical Center in Chicago supports this and more. A long-running and detailed study of nearly 1,000 elderly people has found that those who ate certain foods in their diet—those that contain certain natural compounds known as flavonols—were less likely to get dementia. Seriously less likely. His study reports that flavonol consumption was “associated with slower decline in global cognition, episodic memory, semantic memory, perceptual speed, and working memory.” What foods are we talking about? Kale is on the list. So is broccoli. But there are happier foods too. Drinking tea is great for you: It has plenty of the key flavonols. Tomatoes, apples, spinach and beans all make the list. Researchers admit that they “do not fully understand” how flavonols fight cognitive decline, but the compounds have anti-inflammatory and antioxidant properties.
European Trader:
-In fact, the outlook for 2023 across the pond can be summed up in one word: grim. Germany and the United Kingdom, two of the region’s biggest economies, are probably already in recession. The 19-member euro area will likely experience a prolonged downturn as well, according to the latest forecasts from the European Central Bank and the International Monetary Fund. For analysts at J.P. Morgan, the best investment bet is to try to avoid companies that are more exposed to consumer spending. Along with higher prices, households will also be coping with rising European Central Bank interest rates. That means favoring healthcare, utilities, and possibly banks. In Germany, that could be Deutsche Telekom or Bayer, two of the best-performing stocks in the DAX this year. Aerospace giant Thales is the best performer in the French CAC 40 in 2022. In Spain, it’s the banks that have done well— Banco Sabadell and CaixaBank are among those with the biggest share gains of the past year.
Emerging Markets:
-A Federal Reserve pivot should boost emerging markets currencies and bonds, says Michael Arno, a global fixed-income analyst at Brandywine Global Investment. He’s betting on currencies in Thailand and Indonesia, which would also benefit from renewed Chinese tourism, and sovereign bonds of Colombia, which he thinks have overreacted to the election of leftist President Gustavo Petro. Omotunde Lawal, head of emerging markets corporate debt at Barings, is mining for gold amid the dross of distressed Chinese developers, as Beijing commits billions to rescuing its critical property sector.
There are a few problems with these hopeful scenarios: The Fed might not pivot, and China might not reopen. State Street’s Mallik is particularly cautious on that second premise. “Many times we’ve seen one step forward, two steps back from China,” he says. “We’re in a wait-and-see position for now.” Even if both conditions are fulfilled, managers’ eclectic picks are a rounding error on an emerging markets index topped by Chinese internet giants Tencent Holdings and Alibaba Group Holding, and chip makers Taiwan Semiconductor Manufacturing (TSM) and Samsung Electronics. No one seems very excited about the Big Four.
Commodities:
Next year, Wall Street banks are predicting that oil prices will rise from current levels around $75 per barrel to $100 or even higher. In a recession scenario, however, there’s precedent for petroleum to fall precipitously, perhaps as low as $50. In a bet between $50 and $100, we’d lean toward the high side. The setup for 2023 had looked extremely bullish just a few weeks ago. Europe’s ban on Russian oil shipments, and its price cap on exports to other countries, looked likely to force Russian oil completely out of the market, causing buyers to pay up for the limited global supply remaining. On the demand side, China has begun to loosen its Covid restrictions, which should jump-start oil and gas use there. Those factors are why almost all Wall Street analysts predict that oil will average more than $90 a barrel next year, with some expecting prices to sit comfortably above $100. The average 2023 estimate for Brent crude is $95. But the futures curve is telling a different story, forecasting oil at $80 in the middle of next year. Front-month Brent futures are at $79. Recession fears are outweighing supply shocks. Or, as analysts have become fond of saying, Powell has become more important than Putin.
Streetwise:
-This week, jack Hough asks why Roblox is not America’s most prosperous company. Its daily average users hit 56.7M in November, up 15% year over year. And its business economics could make a 19th century coal mine scrip store jealous. Most Roblox users are kids—half are under 12. They ask their parents for Robux to spend on hoodies, pets, dance moves, and more for their avatars. The company sets the exchange rate: For $9.99, you get 800 Robux. You can sweeten the rate by buying in bulk or signing up for Roblox Premium with recurring purchases. Users develop the games and digital merchandise. Roblox collects 30% of purchases—to start. For developers to convert their earnings to cash, they have to make 100,000 Robux. Most games flop, so users plow their Robux back into the game, or spend it on platform advertising to lure players. If a developer succeeds in earning 100,000 Robux, the exchange rate for sales will get them $350, even though the best exchange rate for purchasing that many Robux would cost $1,000. Also, only Roblox Premium users can sell.