Here are the top 10 themes for markets and the global economy for 2023, according to BofA

As is customary in the latter half of the fourth quarter, market strategists and economists across Wall Street have been publishing year-ahead outlooks outlining the top trades and themes across markets for the year ahead.

The latest roundup comes courtesy of Bank of America’s T.J. Thornton and a host of other in-house strategists and economists, who on Monday shared a rundown of the 10 top macro themes from Bank of America Global Research, attributing each theme to the Bank of America strategists or economists who proposed it.

Some of the biggest themes for markets include the notion that markets won’t turn “risk on” until midyear, that a global recession is all but inevitable, and the notion that China’s economic reopening after years of COVID-19-inspired lockdowns could have major ramifications for commodities, particularly industrial metals.

As a recession and credit shocks hammer risk assets, investors should be long bonds, particularly 30-year Treasurys, during the first half of 2023. The notion that the S&P 500 typically bottoms six months ahead of recession’s end suggests a rebound starting around midyear. As BofA expects U.S. stocks will hit new lows in the first half of next year, Chief Investment Strategist Michael Hartnett reiterated his oft-repeated recommendation for equity investors: “ Nibble at S&P 3,600, bite at 3,300, gorge at 3,000.”

Expect a mild U.S. recession during the first half of 2023, with the risk that it starts later in the year. Europe will likely see a recession starting this winter, with a shallow recovery thereafter, according to Ethan Harris, the head of BofA’s global economics research.

BofA expects the Treasury yield curve to dis-invert while rates volatility falls. By the end of the year, credit strategists estimate yields on both two-year notes and 10-year notes will end at 3.25%. Sectors hurt by rising rates in 2022 may benefit in 2023, according to BofA rates strategist Mark Cabana.

“We expect a gradual China reopening starting now with most curbs removed [in second half of 2023,” said BofA’s Helen Qiao, chief economist for Greater China. BofA expects China’s economy to grow by 5.5% next year, which is higher than the consensus on Wall Street.
“Once inflation and rates peak in the U.S. and China reopens, the outlook for [emerging markets] should turn more favorable,” said David Hauner, head of EM cross-asset strategy.

In particular, copper prices could rise by 20% next year. “Recessions in key markets are a headwind, but China reopening, a peaking dollar and especially an acceleration of renewables investment more than offset these negative factors,” said Michael Widmer, senior metals strategist.

“Russian sanctions, low oil inventories, China reopening, and an OPEC that’s willing to cut production in case demand weakens keeps energy prices high. Brent Crude should average $100 per barrel over the course of 2023 and spike in the second half of the year at $110,” said Francisco Blanch, head of global commodities, equity derivatives and cross-asset quantitative investment strategies.

A strong labor market, the decoupling between U.S. and China, and higher standards for environment, social and governance should keep capital expenditures strong, said Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Securities.

Inflation will likely moderate next year, but some workers will likely experience job losses as the U.S. unemployment rate peaks at 5.5% during the first quarter of 2024, according to Michael Gapen, chief U.S. economist at BofA.

Investment-grade credit should rally next year as weaker prospects of growth and higher rates leads management to shift prioritization to debt reduction. U.S. Investment Grade Strategist Yuri Seliger sees a roughly 9% total return from investment-grade credit in 2023.

Stocks rose sharply Monday, with the Dow Jones Industrial Average  jumping nearly 530 points, or 1.6%, while the S&P rose 1.4%. The S&P 500 is down more than 16% for the year to date.
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Joseph Adinolfi is a markets reporter at MarketWatch.
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