Investment Research

January 2023

Issue_145

MARKETS – 2023: THE FED ITSELF IS THE BIGGEST RISK In this issue: The only macroeconomic hurdle for 2023 - PAGE 3 Growth: The big question mark - PAGE 4 Why does Fed poses a risk? - PAGE 5 Reasons for optimism in 2023 - PAGE 6 When does the probability of investment losses become 0%? - PAGE 7

XSpot Wealth Investment Research Team

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WEEKLY REPORT Issue_145  Senior Portfolio Manager

The beginning of 2023 is extremely interesting and different from the overall course of 2022. Already the first sessions have brought significant gains in American and European indices, with bonds participating in the rise in America as well as in the Eurozone.

Performance of US Indices

Source: Bloomberg

Performance of European Indices

Source: Bloomberg

XSpot Wealth Investment Research Team

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WEEKLY REPORT Issue_145

THE ONLY MACROECONOMIC HURDLE FOR 2023 2023 has begun with the biggest macroeconomic uncertainties behind it and essentially has only one major hurdle to face. The probability of a recession and its extent. Before analyzing the scenario of a recession further, it is interesting to see the course of inflation, which on Thursday also recorded a further decline. It is now at 6.5% and appears to have gained a steady downward momentum.

Source: Bloomberg

As we have mentioned in our previous analyses, the factors that led inflation to this sharp rise have disappeared and even the most persistent of them, such as rents, have began to move downwards, which means that in the next period, we expect a continuation of the aggressive fall in inflation. The chart below shows inflation annualized on a quarterly basis and excluding rent prices, which have fallen significantly. According to this indication and in addition to evidence from other important indicators that we have reported in the past, it shows that in 2023 we could have a positive surprise in falling inflation, which is not currently captured in the estimates of analysts and investors.

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WEEKLY REPORT Issue_145

Source: Bloomberg

In line with all of the above, if inflation continues to decelerate, hedge funds and other large investors that use inflation as a parameter in their strategies should start to open positions in the markets again.

GROWTH: THE BIG QUESTION MARK Inflation may be falling, but the Fed continues to raise interest rates and is still not at the stage where there is a pause in interest rate hikes. This means that the real economy is still under pressure from both expensive money and lack of liquidity in the economy. As long as the Fed continues to absorb money from the economy, it worsens the conditions for growth and this is reflected in the fall in GDP.

The big question of all these factors remains this: will the US economy go through a deep recession? According to Fed officials, falling inflation means the Fed is in a position to reduce the intensity of its actions in order to allow the economy to continue growing. In fact, according to the latest estimates by Fed officials, the scenario for a soft landing has significantly gained ground in the last period of time. Monitoring a range of macroeconomic indicators, as well as indicators measuring investment, economic and business sentiment, our view since last August has been that the most likely scenario for the US economy is a mild recession. All the above indicators still advocate this and in fact in many cases, their current levels are considered too extreme. Page 04 XSpot Wealth Investment Research Team

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WEEKLY REPORT Issue_145

WHY DOES FED POSES A RISK? In 2022 we faced: Ukraine-Russia war, the fastest rise in inflation, the fastest rate hike by the Fed, China's problems that brought a deterioration in investor sentiment, fears of a debt crisis in emerging economies due to high interest rates and a strong dollar, fears for severe global recession. For 2023, as we mentioned above, the main unknown is the course of American growth as well as the course of corporate profits. So how can the Fed be a problem? According to recent data, investors have lost confidence in the Fed's ability to act protectively for the economy. This means that there are now too many who believe that the Fed's insistence on high interest rates for a longer period of time (higher for longer) will lead to an "accident" to the economy. This uncertainty is made even greater by the lack of determination shown lately by its head, Jerome Powell. At the penultimate Fed meeting for 2022, Powell said the Fed's purpose is not to "dismantle" the economy and then come back in to save it. This caused a positive impact and the markets skyrocketed. Just a month later, however, Powell's responses cast doubt on the previous pledges, leading investors to worry more about the Fed's control over the economy. Starting in 2023 and with the Fed's first meeting scheduled to take place on February 1st, we should keep a close eye on its statements about the future "path" for the implementation of monetary policy.

HOMEBUILDERS: DO THEY HAVE A DIFFERENT VIEW ON THE ECONOMY? It is impossible for an economy to be headed for a recession and the homebuilding industry, which is one of the most sensitive to a recession, to be moving up. The index's decline from its highs is approaching 50% but since its June 2022 lows, it has rallied nearly 30% with many companies recording gains of over 60%. Are investors seeing something better on the horizon than the markets are capturing?

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WEEKLY REPORT Issue_145

Source: Bloomberg

REASONS FOR OPTIMISM IN 2023 Leverage is up to pace with the returns of the S&P 500 as the higher the prices the more margin there is in an investment account and used for new purchases. When stocks fall, liquidations soar. Because circumstances are different each time, we like to focus on statistical observations that capture reality as it is. And the following indication leaves us optimistic for 2023.

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WEEKLY REPORT Issue_145

WHEN DOES THE PROBABILITY OF INVESTMENT LOSSES BECOME 0%? As we have mentioned, investing is a long-term process and the longer the time horizon, the more an investment is able to achieve the maximum return with the least possible risk.

What is this risk? Can an investor with positions in the largest stock market find himself with less money?

S&P 500: 1926 - 2015 Time Frame

Positive

Negative

Daily

54%

46%

Quarterly

68%

32%

One Year

74%

26%

5 Years

86%

14%

10 Years

94%

6%

20 Years

100%

0% Source: Returns 2.0

The table above is perfectly clear. Ignoring the timing factor, a long-term investor, after 10 years of investment has a minimal chance of being negative. This confirms other research, according to which investments are the most effective way to multiply your capital.

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Investment Research

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