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Navigating through 5 key risks:
Inflation, Earnings, Interest rates, other Policy risks and War.
Going into the New Year, the Index is likely to begin the year on a positive note, with one of the key areas of concern (Inflation) having peaked in 2022 and likely to trend lower in Q1. There is low risk of higher-than-expected inflation in Q1.
Earnings:
According to analyst estimates, corporate earnings are expected to bottom out between Q4-2022 and Q1-2023 (Source: Refinitiv). Earnings season will kick off in the week of 10th Jan 2023. While revenue / earnings estimates have been revised downwards in the last 12 months, any misses is likely to have a negative impact on prices.
The Fed Fund rates are currently at 4.25% to 4.5%, with the target peak rate at 5.1 in 2023. Assuming inflation data continues to trend downwards, Q1 could see two rate hikes of 50 bps each, in the Feb and March FOMC meetings. The current 5YR US Treasury Yield at 3.95% is higher than the Nasdaq 100 earnings yield (TTM) of 3.5%. With earnings yet to bottom out, this is a key downward risk for the index in Q1.
Is the US going into a recession?
Strong Job Market: Monthly Job Openings data in 2022 continues to trend higher than previous years, unemployment rates continue to remain subdued and hourly wage increases continue to remain in the 4.9% to 5.5% range. (Refer charts)
Based on the current data, it is unlikely we will see a recession in Q1, however this is likely to be a key question for the year, particularly towards Q4-2023.
Technical Analysis:
The index is trending lower since Nov 2021, with every rally sold into by investors.
Support & Resistance: The Nasdaq 100 is likely to trade between 12000 and 9500 in Q1 2023.
Earnings are likely to play an important role in driving market sentiment, particularly on the downside.
There is a possibility of buying interest / a short covering if the Fed "pivots" in the Mar FOMC and indicates a pause in interest rate hikes. Such a rally could potentially look at the 14000 levels on the index. However, this is speculative and currently there is no indication of either a Fed pivot or the index trading above 12000.
Other risks in Q1:
What is currently missing in newspaper headlines is the disagreement between US policies promoting green tech and manufacturing companies to setup in the US and EU policy initiatives to reign in Big Tech.
There is also lingering worry about an increase in Covid cases in China since the withdrawal of the zero covid policy.
There is a low possibility of a peace agreement between Ukraine and Russia in Q1-2023 and as long as the war in Ukraine continues, geo-political risks will remain.
Strategic and Tactical portfolio allocations that we will continue to explore in Q1: 1. Short term maturity (2 to 3 year) bond allocations in Treasuries / IG bonds.
2. Geographic diversification in equities.
3. Tactical buys in single name stocks / ETFs / Indices.
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