Stocks, Recession, and Rate Hikes: What to Expect in 2H 2023

After a whirlwind first half of 2023, investors have questions about what to expect in the second half. Should we brace for a recession (or are we already there?) What economic trends should we watch? Can we expect additional Fed rate cuts?

So, we turned to the professionals. Justin Zacks, Vice President of Strategy, Moomoo Technologies Inc., and Olivia Higgins, lead host of Moomoo Singapore, sat down for an Ask Me Anything (AMA): Stock Market Thoughts for 2023.

In a wide-ranging conversation based on Moomoo users’ questions, Zacks shared his insights on rate hikes, 2023’s first half, retirement planning, and much more. Let’s dig in.

What market trends, economic indicators, and industry performances shaped 2023’s first half?

In January, markets were treading along the bottom; there was a lot of fear and focus on inflation and the Federal Reserve’s reaction to it. Since then, we have seen inflation subside at a faster pace than expected and that development has buoyed many investors’ spirits.

The numbers show the economy in general is doing well. U.S. Gross Domestic Product (GDP) grew at a 2.4% annualized rate in the second quarter following a similar positive reading in the first quarter. While many expected that we’d fall into a recession, that hasn't happened yet.

Earnings for the most part have also held up relative to expectations as we enter the second quarter earnings season.

Despite these positive trends, the Fed is still likely to continue hiking rates. That’s because inflation is still high relative to historic norms and above its two percent mandate. There's also a lot of uncertainty going into the back half of the year.

Is the US in a recession? If not, what’s the possibility of entering one?

Remember, economic data is backward looking; it takes a while to compile all of it, release it, and then react. This means we’re reading data that happened a month ago. One of the more extreme examples of this lag is housing data.

Housing data is compiled once a transaction closes, but the actual price may have been agreed upon months before when the contract is signed. This complicates the use of such data to gauge the current state of the economy.

This data also impacts inflation data with a lag. Housing prices are linked to about a third of the consumer price index (CPI) in what's called owners’ equivalent rent. Existing home sales declined by 3.3 percent from May to June — the fourth month in a row of year-over-year declines with the largest drop since December 2011.

Instead of looking only at housing data for recession indicators, investors should also keep an eye on Gross Domestic Product (GDP) which has remained in positive territory in 2023 as previously mentioned.

When looking at some of the lags, there is also a real question about whether the Fed is making decisions based on current economic conditions. Additionally, its own actions take time to work through the system.

Should investors expect a potential year-end rate cut from the Federal Reserve?

At the beginning of the year, there was a much larger expectation that we would see the Fed cut rates. Today, about 75% of the moomoo community thinks we're not going to see a rate cut.

You can also see this sentiment in the market pricing of swaps and in market participants’ expectations. These factors suggest a possible rate hike by the end of the year, and no rate cuts until the January - March period.

July’s rate hike grabbed the market’s attention, but the Fed has a mind of its own. Regardless of what the market (or individual investors) thinks, the Fed has its own opinions — and they are the ones making these decisions. They updated their Dot Plot, which charts their expectations for the direction of future interest rates, a few months ago and are now projecting Fed funds to end the year in a 5.5 to 5.75 range, on average.

While there are many different thoughts regarding the rate level at the end of 2023 from each individual Fed member, that's an additional 50 basis points on average from here. When you look at the whole picture, a significant change might be needed for a cut to happen — some type of economic malaise, a large rise in unemployment, or a large disinflation, particularly among that core Consumer Price Index (CPI) and core Personal Exemption Consumption Expenditure (PCE) index.

Have these answered some of your burning questions? These represent a portion of the ones Zacks addressed in the AMA. He also discusses the Nasdaq-100’s rebalancing, short selling, retirement planning, and more. Watch the entire AMA here, and moomoo community events.