The ASX was down today, hit by a lithium sell-off and weak Chinese data.
The S&P/ASX200 dropped 41.60 points or 0.57% to 7,209.70 crossing below its 20-day moving average. Over the last five days, the index has gained 0.48% but is down 3.16% for the last year to date.
Bottom-performing stocks in this index are Pilbara Minerals Ltd (ASX:PLS) and Core Lithium Ltd (ASX:CXO), down 10.77% and 8.37% respectively.
Looking at the sectors, Consumer Staples topped the day with a 0.73% rise, followed by Energy at + 0.40%. Materials was the worst performed falling 1.35%. Consumer Discretionary lost 1.25% on the day.
What’s making news
2022 – a quick recap
IG’s market analyst Hebe Chen offers a quick recap of 2022 and gives her take on ASX in 2023.
1. 2022 was a turbulent time for Australia’s stock market
This year has been an unpleasant year of decades-high inflation and non-stop rate hikes. In June 2022, the benchmark index tumbled into the correction zone for the first time in two years, which is defined by a 10% drop from the recent peak.
Nevertheless, the benchmark index still enjoyed monthly gains for the majority of the time. By the end of November, the index had pared more than half of the loss and sat only 3% below the level where the year started.
2. Interest rates will continue rising towards and potentially surpass the decade-high level
Based on the future market’s prediction, the third quarter of 2023 will see interest peak at around 3.6%. That is to say, the months ahead in the new calendar will present opportunities to see the inception point finally arrived for the local monetary policy.
Even with the absence of the first rate-cut to occur, the pause of the current tightening journey is likely to reignite the risk appetite for Australian equities.
3. The attractive valuation is another source of tailwind for 2023
The Aussie share market’s valuation has become much more appealing today compared to a year ago, with the Price/Earnings (P/E) ratio now below the five and 10-year average.
Consumer confidence bounces
Consumer confidence has bounced from near-record lows thanks to optimism that the RBA’s tightening cycle might end early next year, eToro market analyst Josh Gilbert explains.
The Westpac-Melbourne Institute index of consumer sentiment jumped 3% in December, a decent improvement from November's 6.9% decline. However, despite the positive move, the reading of 80.3 is still near decade lows, showing consumers continue to be highly pessimistic.
According to Westpac chief economist Bill Evans, the outlook on economic news is becoming less negative, which is helping to drive more positivity from consumers.
Lower inflation in October and a tight labour market helped consumers feel greater confidence in their job security and smaller rate hikes from the RBA helped to improve the housing market's outlook.
The next big test for consumer confidence will be the quarterly inflation reading in January. This will likely be the peak of our current inflation cycle and will leave some room to further increase consumer confidence in the economy, particularly if they believe the RBA can deliver a soft landing.
Inflation headwinds to remain
deVere Group CEO and founder Nigel Green says that despite the Federal Reserve’s decision to reduce the size of interest rate hikes, inflation will remain a major headwind well into next year.
The warning comes as the US central bank’s rate-setting Federal Open Market Committee voted to boost the rate half a percentage point, taking it to a targeted range between 4.25% and 4.5%.
The Federal Reserve signalled that it sees the terminal rate at 5.1%.
“The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But it will take substantially more evidence to give confidence that inflation is on a sustained downward path,” said Fed Chair Jerome Powell.
Green says: “Driven by cooler-than-anticipated inflation data on Tuesday – after which all three Wall Street indexes closed higher – and after four straight three-quarter percentage point hikes, we finally get a smaller bump: half a percentage point.
“This is the seventh and final hike of the year and it appears that the Fed is cautiously winding down its hiking program.
He continues: “The most eagerly awaited part of the event was the press conference with investors keen to judge Fed Chair Jerome Powell’s words to see if there was guidance about the central bank outlook being more hawkish or dovish.
“It was clear that Powell is still concerned about inflation and, therefore, is keen to talk down expectations.
“We may have seen, or be seeing, peak inflation but, clearly, inflation will still be an issue for well into next year.”
As such, investors should take a look at stocks that are likely to be recession-resistant. For example, people will still need food, energy and financial services during a downturn. These sectors should do well.
“Although it is likely that investors will be seeking to increase exposure to growth stocks towards the end of 2023 as cost of living eases and global growth picks up pace, it’s important that they don’t get ahead of the market right now,” Green adds.
“More favourable market conditions are coming in 2023, and the Fed’s latest decision on rates supports this. But inflation remains the major headwind for investors into next year.”
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