Stock market faces two conflicting drivers: Chris Wood

Jefferies’ global strategist Chris Wood said the world stock markets face two conflicting drivers at the start of 2023: one negative and one positive.

The negative is that the US stock market, despite the 19.4% decline in the S&P500 in 2022, has not yet fully discounted the earnings downgrades that would occur in the event of a recession.

The positive is the potential for a dramatic U-turn in Federal Reserve policy in 2023 when the American central bank suddenly focuses on the mounting recession risk, said Wood in his weekly newsletter Greed and Fear.

“The key point will then become whether the Fed gives greater priority to fighting recession over getting inflation below its 2% target since it is unlikely, though not impossible, that headline inflation will have fallen below that level by then,” said Wood.

He said the Federal Reserve’s so-called “dot plot”, in terms of individual Fed governors’ forecasts, indicates no Fed rate cut before 2024, while money markets expect one later in the third quarter of 2023 or earlier in the fourth quarter of 2023.

He said valuations in India, Greed and Fear’s long-term favourite, are “undoubtedly challenging”. The Nifty trades at 18.8 times 12-month forward earnings, compared with 10-year average of 17.2. “If this is somewhat of a concern tactically, the fact remains that India remains by far the best domestic demand story structurally in the Asia and emerging market universe,” said Wood.