US markets set for a year-end rally despite recession concerns: Chris Wood

US markets are set for a year-end rally despite looming concerns of a recession in 2023, believes Christopher Wood, global head of equity strategy at Jefferies. 

Wall Street-correlated world stock markets, Wood believes, have taken some comfort from a Wall Street Journal (WSJ) article first published last Friday that focused on the potential for Fed tightening to slow after the assumed 75 basis point (bp) hike in the federal funds rate to 3.75 – 4 per cent at the November meeting. This, he said, creates the potential for “another peaking out of inflation” narrative to support markets into year-end, most particularly if the October CPI data point comes in lower because of the improved base effect.

“This, and a perceived positive outcome of the mid-term elections, has the potential to drive a rally into year-end even despite the obvious earnings downgrade risks going into next year because of the rising recession risk,” he wrote in his weekly note to investors, GREED & fear.

In the last one month, most US indexes have had a good run with the Dow Jones Industrial Average (DJIA), S&P 500 and the NASDAQ rallying 5 per cent to 14 per cent, data show. The impact trickled down to the Indian markets as well with the S&P BSE Sensex and the Nifty50 surging nearly 4 per cent and 5 per cent, respectively during this period.

Meanwhile, according to the findings of BofA Fund Manager Survey (FMS) for October, 38 per cent of global fund managers now expect the US Fed to end its current rate hiking cycle in the first quarter of calendar year 2023 (Q1-CY23) as opposed to Q2-CY23. Nearly 371 panelists with $1.1 trillion in assets under management (AUM) had participated in the survey held between October 7 and 13, BofA Securities said.

A rally in the US markets amid hope of a softer central bank (US Fed) action going ahead, analysts believe, has the potential to fuel a rally in other global equity markets, including India. 

The market, V K Vijayakumar, chief investment strategist at Geojit Financial Services said, is poised to continue the ongoing rally aided by support from the mother market US where the Dow’s 828-point rally last Friday recorded fourth straight week of gains. 

“The driving force behind the ongoing rally is the strength of the US economy, which is indicating a lower probability of an immediate US recession and, more importantly, indications that inflation is plateauing and might show a declining trend soon. This might enable the US Fed to slightly moderate their hawkish stance. Already central banks of Canada and Australia have hiked rates below expectations. If this trend spreads, that will favour continuation of the rally in the short-term,” he believes.

That said, the key risk to the road ahead for the Indian markets, analysts believe, are crude oil prices. A sharp rally and sustenance above $100 a barrel is likely to fan inflation concerns, which will be perceived as a negative by the markets, they said.

“The Indian market is close to bottoming out. However, it could remain volatile in the short-term depending upon crude oil prices. If oil moves beyond $100 a barrel, it would be a major concern, albeit only for the short-term. Rate hikes by global central banks would eventually lead to lower global economic growth and lower demand for oil. In this backdrop, both the medium to long-term outlook for the Indian markets remains healthy,” said G Chokkalingam, founder and chief investment officer at Equinomics Research.