The Federal Reserve has played a major role in shaping markets in 2022, leading a campaign of monetary tightening as it tries to tackle inflation that has reached multi-decade highs.
Many who had money in stocks and even bonds suffered as liquidity was sucked from the market with every rate hike employed by the Fed – seven of them in the past year alone. In mid-December, the central bank raised its benchmark interest rate to the highest level in 15 years, bringing it to a target range of between 4.25% and 4.5%.
Previously, the United States had seen four consecutive three-quarter point increases – the most aggressive policy moves since the early 1980s.
Fed officials and economists expect rates to stay high next year, with cuts unlikely through 2024. But that doesn’t mean the Fed will remain the main driver of markets. Patrick Armstrong, chief investment officer at Plurimi Wealth LLP, sees different financial drivers taking over the reins.
“Next year, I think it’s not going to be the Fed that drives the market. I think it’s going to be the companies, the fundamentals, the companies that can grow their earnings, defend their margins, probably grow,” Armstrong said. to CNBC’s “Squawk Box Europe” on Friday.
“Bond yields give you a real return now, above inflation. So it’s a reasonable place to put capital now, when at the start of this year it didn’t make much sense. It was hard to expect a return above inflation where the yields were.”
The yield on the 10-year U.S. Treasury was 3.856% on Friday, a rapid rise from 1.628% at the start of 2022. The yield on the benchmark note hit an all-time low of 0.55% in July 2020. Bond yields prices move inversely.
Screens on the floor of the New York Stock Exchange (NYSE) show Federal Reserve Chairman Jerome Powell at a news conference after the Federal Reserve announced interest rates would rise by half -percentage point, in New York, on December 14, 2022.
andrew kelly | Reuters
“What happened this year was driven by the Fed,” Armstrong said. “Quantitative tightening, higher interest rates, they were pushed by inflation and anything that was liquidity driven was sold off. If you were stock and bond investors, you entered the market. year getting less than one percent on a 10-year treasury, which makes no sense Liquidity has been driving the market, [and] liquidity, the rug has been pulled under investors.”
Armstrong suggested that the United States could “flirt into recession probably by the end of the first half of next year”, but noted that “it’s a very strong labor market there, growth Wages and consumption make up 70% of the US economy, so it’s not even certain that the US will fall into a recession.”
The key for 2023, the CIO said, will be “finding companies that can defend their margins. Because that’s the real risk to equities.”
He noted that analysts expect a 13% profit margin for the S&P 500 in 2023, which is a record.
But inflation and Fed tightening can still present a challenge to that, Armstrong argued.
“I don’t think you can achieve that with a consumer who sees their wallets pulling in so many directions, energy costs, mortgage costs, food prices, and probably facing a bit of unemployment which starts to rise as the Fed continues to rise, and it’s designed to destroy demand,” Armstrong said. “So I think that’s going to be key for stocks.”
— CNBC’s Jeff Cox contributed to this report.