Major themes to watch in 2023: Interest rates, inflation, US dollar and sector rotations

2023 is around the corner. And if the new year is anything like 2022 — it will be another long year of early afternoon drinks.

But have no fear; the Fed pivot may be near. 🤞

Enough bad rhymes. Let’s dive into the major themes we’re watching over the next year.

1/ Interest rates: Will we see a cut in 2023?

The Fed is expected to slow the pace of rate hikes today. It won’t be zero, but we’re on our way there.

Now, the question is, when will they lower rates?

A JPMorgan survey last week showed that ~45% of investors expect the Fed to cut rates in 2023.

2/ The US Dollar: Have we peaked?

The USD is trading at multi-decade highs — hurting other global economies and even negatively impacting many US companies.

Since October, the USD has already fallen 9% against a basket of six other major currencies.

Why does this matter? A lower USD means US goods would become cheaper to the rest of the world — benefiting US companies with greater international exposure.

3/ Inflation-linked bonds: Downhill from here?

Treasury Inflation-Protected Securities (TIPS) and Series I Savings Bonds have been popular inflation hedges for 2022.

Their returns are directly tied to inflation. The higher inflation rises the higher their returns.

The current return on the Series I Savings Bonds:

That’s already down from 9.62% in the previous six months. And after yesterday’s CPI report, it seems like inflation is trending down.

4/ Value vs. Growth: Are we in for another rotation?

Growth stocks began their decline at the end of 2021. And they kept on falling… and falling…

Those that caught on early moved to cash or parked their money in defensive industries:

• Top S&P 500 Sectors: Energy (+53%), Utilities (+0.6%), Consumer Staples (1%), and Healthcare (1.3%).
• Worst S&P 500 Sectors: Communications (39%), Consumer Discretionary (32%), Real Estate (26%) and Information Technology (24%).

Here’s how value vs. growth stocks performed this year:

Here’s what we’re looking for in 2023: The Fed pivot (lowering rates), markets to bottom, and a rotation back to growth. But don’t expect it to happen in that order.