REVIEW 2022 and OUTLOOK 2023

EMR December 2022

Dear Reader


Forecasting is a demanding exercise. Depending on the data quality of the series one uses it is possible to asses a “promising” outlook. In this EMR, we focus on the development of real GDP in the U.S. – depending on the business cycle – compared to the developments of stock indices.

What does the US real GDP chart describe the past cyclical developments and what can we deduce for the near future?

  1. The recent cycle does not confirm the widespread pessimism. Actually, so far into the new cycle real economic activity has been sustained and has been surpassed only by the 1949/Q4 recovery.
  2. Examining the longer-term cyclical developments, one finds that the divergence increases from cycle to cycle.
  3. Are we facing a short-term correction of 2020/Q4 to 2011/Q2 or even a longer-term correction i.e., recessionary phase?

Given our interest in financial investments let us now analyze the developments of selected equity market indices since 1973.

What can be inferred form the chart?

  1. What does the graph of stock indexes imply about their respective changes, both on an “index-by-index” basis and in cyclical comparison? What dependencies can be inferred regarding a promising investment policy?
  2. The graph demonstrates, especially in the long run, a significant deviation between one stock index to another.
  3. The trends of the DJIA, the Dax and the SMI indexes, while moving mostly in the same direction, add up to a significant performance differential, specifically since the early 1990s.
  4. The performance of the UKX and NKY indexes is really amazing, aren’t they?
  5. Contextually, it is really worth asking what the role of currencies has been, both in the long and short run, and also in relation to sectoral economic changes.

At this point in time, it is also worthwhile to examine the developments of 10-Y government bond yields, as shown in the following chart.

Our analysis tells us that a sizeable number of analysts have omitted to take into serious consideration the interplay between supply-side and demand-side determinants of the economy, the rate of inflation as well as of the financial markets.

Central banks on their part acted and reacted mainly to demand-side determinants. During the pandemic, debt-financed funds were “generously distributed.” This expansionary policy led, as expected, to higher demand, which, combined with rising energy prices, led to dramatic energy supply shortages. Consequently, prices of intermediate goods began rising as well. The “unexpected” result has been an increase in consumer prices, which in due turn pushed wage-demand higher. The world economy found herself in the midst of a vicious cycle. In response, central banks began to push interest rates higher at an unprecedented pace. Analysts and a sizeable number of market participants reacted with portfolio-adjustments, resulting in a sizeable equity market sell-off. Given that economic data are lagging indicators, they focused on selling stocks while switching to fixed-income securities.


Recalling the errors incurred in 2022 we ought not to forget that the prospects for 2023 remain characterized by well-known imponderables. The difficult question to be answered at this juncture clearly concerns the end of the disastrous Russian invasion of the Ukraine. This “hoped-for” return to normalcy would undoubtedly lead to lower crude oil and gas prices, and in due time, reduce also fears of persistently high inflation – and stimulate the flow of much-needed technological inputs. The result would be a resumption of economic activity.

For Central Banks, this would involve deterministically reducing recession fears and abandoning restrictive monetary policy. This, in turn, would promote an economic recovery that should revive stock markets.

Historically, high inflation rates have been known to cause stock losses, as it was the case in 2022. However, history teaches us that patience is a promising attitude.


Assuming that the Russian invasion of the Ukraine will not be successful, it may be assumed that Russian oil and gas supplies will slowly increase, and that this should tend to reduce the inflation rate. This suggests that it is unlikely that national banks will have to continue to raise interest rates as sharply as they have done recently. In other words, the longer-term attractiveness of fixed-income securities is likely to diminish.

We believe that bond yields should tend to reduce the attractiveness of equities in the first two quarters of 2023. Our assumption remains largely dependent on the economic slowdown. The necessary and sufficient condition is that inflation begins to fall in line with the decline in energy costs.

Our current reading of the facts seems to suggest that the need for national banks to continue raising interest rates, as sizably as they did in the last half of 2022, is unlikely to persist much longer. In other words, the appeal of fixed income is likely to be limited to the next few months. We believe that bond yields could curb the appeal of equities in the first two quarters of 2023. Our assumption in this regard is largely driven by the economic slowdown, which will lower inflation in due course. In particular, the necessary and sufficient condition for the inflation rate to start falling will be a reduction in energy costs. In any case, special attention should be paid to currency fluctuations in international diversification. Highly indebted companies should be avoided.

As Swiss investors, we continue to prefer the local market, at least as long as the end of the interest rate cycle is in sight.


Comments are welcome.



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