January 27, 2023

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Olaf Chen sets his sights on economic growth after stock market’s heaviest year since 2008: – Once there, hit

The stock market in the United States of America concluded, on Friday evening 2022, the stock market in Norway, as the last trading day of the year ended as follows for the most important indicators:

  • The S&P 500 fell 0.3 percent.
  • The Nasdaq fell 0.1 percent.
  • The Dow Jones index fell 0.2 percent.

It is clear, then, that both the US stock market and the world at large have fallen behind in its heaviest stock market year since the 2008 financial crisis.

The MSCI All-World Global Index, which includes both developed and emerging markets, has lost nearly a fifth of its value, buoyed by the sharp decline in the United States. The S&P 500, which is made up of the 500 largest US-listed companies, is down just under 20 percent for the year.

The Nasdaq is down 33 percent, while the Dow Jones is down 9.2 percent in 2022. The former company and its technology companies have been hit hard by increasing interest rates, as the present value of a company’s future earnings is discounted to lower levels — which, in isolation. , leads to lower prices for companies.

The repercussions of economic growth

High inflation, rising interest rates, and geopolitical turmoil were the main drivers, all of which contributed to sharp sell-offs and downward revisions to shareholder values ​​in the billions range.

Long-term interest rates have also increased significantly through 2022.

Olaf Chen, Head of Customization and Global Interest at Storebrand, believes that growth will replace interest and inflation as the main topic in 2023.

The big question will be what consequences the tightening of monetary policy will end up having on economic growth, says Chen.

Led by the US Federal Reserve and Central Bank Chief Jerome Powell, central banks around the world have raised key interest rates at a pace not seen in 40 years.

Jerome Powell thought before 2022 even started that he would roll out a total of three rate hikes during the year.  The total was seven, and many of the interest rate increases were three times stronger than normal.

Jerome Powell thought before 2022 even started that he would roll out a total of three rate hikes during the year. The total was seven, and many of the interest rate increases were three times stronger than normal. (Photo: Manuel Balce Ceneta/AP/NTB scanpix)

– When it first hits, it hits

The aim is to slow their countries’ economies to a path that lowers inflation to the target of 2 per cent – a so-called “soft landing”. However, there is disagreement as to whether central banks will be able to do so.

Leading economic indicators have already pointed both ways. One of the most important labor market figures indicates an unusually small number of unemployed people and an unusually large number of job vacancies.

– I tend to say he could get a little better for a little bit longer, but once he hits, he hits.

Chen believes there is an “excessive” belief in a soft landing in the United States among many economists now, and notes that both the Federal Reserve and many macroeconomists project that unemployment in the United States will rise from 3.5 to 4.5 percent—in his book Definition of a Soft Landing . Chen thinks this is likely to be priced in.

He himself calls it wishful thinking.

– When unemployment first rises by 0.5 percentage point, it is not the case that the rise ends after it has increased by 1.0 percentage point in total – it continues. When unemployment first rises, it rises sharply, at least if you look at history.

He endorses the claim about the overview of unemployment trends in the United States since World War II, and the fact that each recession has led to an increase in unemployment of at least three percentage points and often more.

Weak demand as a result of higher interest rates is a foregone conclusion.

When you get into a negative spiral where rising unemployment leads to weaker consumption and lower demand, which in turn leads to higher unemployment, you have a recession.

Several short, powerful highs

When there’s talk of a downturn in the US in the first half of 2023, Chen believes one has to look a little bit further in time — toward the second half of 2023, maybe even into 2024 — precisely because of strong employment. which is still a market.

Until then, he believes the US stock market will continue to be characterized by the same type of “bear market rally” seen in the past six months.

However, the joker that emerged towards the end of 2022 is the signals of a reopening of China. Where in the West, for months, people have been drawing pent-up consumption out of the epidemic, now hundreds of millions of Chinese are probably prepared with credit cards and pent-up consumption.

There is an upside risk for 2023 that I think is very little to talk about. It could also cause energy prices to rise again, Chen says.

Russia has maintained oil production despite Western sanctions, and is sending it to other markets.  Wiggin believes that the combined sanctions regime with oil service companies that left the country will lead to a decline in Russian oil production in the medium term, as a result of underinvestment.

Russia has maintained oil production despite Western sanctions, and is sending it to other markets. Wiggin believes that the combined sanctions regime with oil service companies that left the country will lead to a decline in Russian oil production in the medium term, as a result of underinvestment. (Photo: Elaine Holland)

– The biggest jump we’ve seen in demand

It is precisely the reopening of China that is the factor that will lift oil prices next year, says Nadia Martin Wiggin, an energy analyst at Pareto Securities. It expects the oil price to average $100 per barrel in 2023.

Wijn believes that if OPEC+ is unable to ramp up oil production fast enough to meet rising Chinese demand, this could lead to a price shock. It also points to Western sanctions against Russian oil and petroleum products as another factor that could push up prices. On Friday, a barrel of North Sea oil was trading at just under $86 a barrel.

– As 2023 approaches, how the West will replace Russian oil and gas in the long term is a major question. The big question is where the investments will come from to make up for the loss, says Wiggin.

These investment decisions will be made in 2023, and will determine oil production further into the future — and Wiggin refers to these decisions as “extremely important,” after a period of weak investment in OPEC nations, among others.

– There are two factors that could lower the price of oil in 2023: if the United States continues to allow oil from strategic oil reserves to flow into the market, and the consequences of a deeper recession in the United States as a result of higher interest rates. High and persistent inflation rates, says Wiggin.

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