With 2023 in full swing and the financial markets stabilising after an indifferent close to 2022, the dark clouds of the financial market appear to be lifting – offering some element of promise for investors.

Adding some context to the markets, the S&P 500 Index experienced its worst calendar year performance for the past 14 years, while the benchmark index dropped by over 5% in December, closing the year down by almost 20%. While investors expressed concern over rising interest rates, sluggish economic growth, and constant high inflation throughout the better part of last year, the tide appears to be changing in 2023.

Investors must take into account the January effect where stock market prices tend to rise more than any other month of the year – especially where small-cap companies usually outperform the big hitters. This is typically the case when investors get rid of underperforming December stocks to lock in a capital loss – inevitably leading to a momentary drop in stock prices.

Early signs indicate that inflation is subsiding, although industry experts caution that the Federal Reserve is still battling with rising prices that could lead to a recession in the first half of 2023 – that’s without taking into account the conflict between Ukraine and Russia that has added to uncertainty in the markets.

With that being said, let’s delve into what could shape the markets by the end of January 2023.

Inflation and Rising Interest Rates

Two main concerns at the start of the year are inflation and interest rates. Without considering volatile energy and food prices, the Federal Reserve’s measure of inflation – core PCE – was up by 4.7% last year, much higher than their long-term objective of 2% inflation. Inflation has already given some indication of softening in the early parts of 2023, although it remains to be seen how consistent that trend will be.

The pace of rate hikes may downgrade by around 0.25% when the Fed reconvenes on 1 February 2023, when they may decide to implement a March rates increase to align with their overall projections – allowing them to then pause with the increases and evaluate the market conditions. There is hope that the Fed will take a softer stance in the first quarter of 2023 and signal a close to an aggressive tightening campaign that investors bore the brunt of for much of last year.

The Increased Risk of Recession

While inflation is trending downwards, this is a critical period in the markets with the risk of recession rising tremendously. Thus far, the Fed has been aggressive in increasing rates without sending the economy into recession – and has slowed its economic growth expectations for 2023.

In the US, home sales are down almost 36% from a year ago – signs of mild recession – while the unemployment rate forecast is sitting at approximately 4.6% – almost 1% higher than the Labour Department’s report in December. This suggests that the US can expect a recession in the first half of 2023 – gaining traction when the labour market slows materially. The manufacturing sector in the US is also weakening, adding to the market damage that may soon follow.

Industry experts expect this much-anticipated recession to end around the beginning of August 2023, with a bear market that may last longer and fall further during this period.

China’s Slow Economic Growth

China’s economic growth last year was one of its worst in around five decades – largely due to their zero-COVID policy that shut down many industries – coupled with a drop in the property market. While retail sales in December surpassed many expectations, the sharp rise in COVID cases significantly affected China’s economic growth projections.

Such negativity inevitably had a ripple effect on global markets – adding to the uncertainty that many investors suffered. Having targeted a 5.5% growth at the beginning of 2022, China only managed 3%. Its adverse effect on the markets means that investors will be steadily nervous in January, probably for the first quarter.

There is hope, however, that a strong rebound in China’s economic growth will soften the blow when the expected global recession finally arrives.

Final thoughts

While the January effect may offer signs of optimism for investors worldwide, cool heads must prevail as experts warn of the calm before the financial storm.

As reported by MarketWatch.com, almost 25,000 global tech workers have lost their jobs since the turn of 2023 and DOW Futures fell almost 200 points sparking recession fears – news that traders must consider when thinking of January investments.

All is not lost, however!

Whether you are a seasoned trader or relatively new to the investment game, be sure to make 4XSolutions a part of your trading portfolio this January. 4XSolutions is the industry’s leading technology provider that brokers and traders use to copy and execute trades, manage risk, and increase profits.

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