LONDON, January 9, 2023 /PRNewswire/ — Stock market gains in 2020 and 2021 were steeper than most bullish analysts had predicted. The S&P 500 jumped 16.3% in 2020 and ended 2021 with more than 27% gains, marking its third consecutive year of double-digit gains. The benchmark index closed at record values as high as 70 times, and investors are looking forward to the recovery of the global economy after the pandemic.
Investors are losing their Mojo
The Bears have been in the hunt for most of 2022, especially in the second half of the year. This is because all major economies have begun to falter under the pressure of rising inflation. Here are the year-to-date losses of the major stock indexes:
S&P 500: -15.11%
Nasdaq 100: -27.61%
EuroStokk 600: -9.90%
German DAX: -8.53%
Central banks around the world, including the Federal Reserve, the Bank of England and the ECB, responded by aggressively raising interest rates. Although the goal was to curb inflation, the impact of rate hikes is that they affect economic growth.
The Fed’s interest rate hikes have also meant a sharp rise in the dollar, which has a negative impact on all other economies. The situation was further aggravated by the energy crisis in Europewhich he brought Russia–Ukraine a conflict that lasted longer than anyone could have imagined. Acuity’s AssetIK Widget shows overly negative sentiment for the major indices.
More than a silver lining
The largely negative market sentiment in 2022 is great news for the new year. This means stock valuations are low, creating attractive buying opportunities that institutional investors will want to grab. The sentiment usually turns positive during the holiday season, prompting the so-called Santa Claus rally. This is a phenomenon observed in the last five trading days of December and the first two of the new year, when stock markets tend to give positive returns. For this to turn into a sustainable rally in 2023, investor sentiment needs to remain bearish through the holiday season.
A scroll down on Acuity’s asset overview widget shows that sentiment is overly bullish for many of the tech giants, meaning risk appetite has been dampened in time for the holidays. This is a good sign. Investors who are too optimistic, too quickly can lead to a sudden rally that the bears will be able to reverse very quickly. This could mean significant volatility in a predominantly tilted chart.
What will support investor sentiment in 2023?
In the back half of 2022, the prospect of a recession grabbed the headlines. Given the aggressive rate hikes by the US Fed and other major central banks, this is not an unfounded concern. However, the market has already responded to this outlook and the bad news is already heavily baked into stock valuations.
On the other hand, major central banks may begin to ease their aggressive monetary tightening. The US Fed has already indicated that the volume of interest rate increases will decrease starting in December itself. Central banks taking a less aggressive approach to raising interest rates will support risk-on sentiment in financial markets.
As the Fed begins to ease its monetary tightening, the US dollar could end its bullish trend against other currencies. In fact, it could start to decline from current elevated levels. This will support other economies around the world that trade in US dollars and improve market sentiment globally. Any decline in the US dollar will also support demand for goods from foreign currency holders.
Prospects for China are also improving. The country has begun to ease strict pandemic restrictions, after three consecutive years of quarantine. As China’s economy fully reopens, growth is likely to accelerate again. Any news of China’s economic recovery supports sentiment in global financial markets.
Moreover, all it takes for the overall market sentiment to turn positive is for a few big stocks to perform well. Tech giants are already gearing up to combat a challenging macro environment next year, with massive layoffs and other cost-saving initiatives.
Empowering retailers amid uncertainty
The only thing that is certain is the degree of uncertainty in global financial markets in 2023. In this context, traders will rely on intelligent content and powerful market research and analysis tools. For example, brokers that integrate Acuity widgets can offer insights, up-to-date news and detailed price action information to traders of all experience levels. Traders can also get an overview of market sentiment for each asset and a deeper look at the factors that contribute to changes in sentiment. All this data, summarized in charts and graphs, allows a quick overview of the financial markets. This allows traders to quickly identify trading opportunities or evaluate their trade ideas against other opportunities before opening or closing a position.
Acuity’s tools can offer brokerages an edge by enabling them to increase trading volume even in difficult macro conditions.
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SOURCE Acuity Trading