It’s been a confusing year for the economy and markets. At the start of 2023, economists are largely predicting a global recession, and Wall Street is bearish on stocks, with many analysts expecting the S&P 500 to end the year only slightly higher than it did. started. Fast-forward 12 months: No recession (yet) and the S&P 500 is near record highs.
Here are 11 charts that help explain how we got here.
Inflation and its effects
Central bankers in the whole world continued an aggressive campaign of interest rate hikes in 2023, raising policy rates in an effort to tame the highest inflation in generations.
Inflation has cooled significantly in many areas, although it remains above the Federal Reserve’s target (around 2 percent), and rate hikes have stalled. The question is how long central bankers will need to keep rates high to ensure inflation is under control without stifling economic growth.
These losses will only be real if the banks have to sell the assets. Before its implosion, SVB was forced to do just that, discounting its bonds at a steep discount to repay depositors. Those losses set off alarms, leading more customers to demand their money back – a classic bank run – and raising concerns about unrealized losses at other regional banks.
Higher interest rates also raised the cost of borrowing for consumers and businesses, which reverberated throughout the economy, especially in commercial real estate.
Rosy economic indicators, gloomy sentiments about the economy
Several macroeconomic data in the United States suggested cause for celebration: Unemployment remained low, and GDP grew rapidly this year. In 2020, wage growth has largely outpaced inflation mainly due to the distortions of the pandemic. That trend reversed this year with wage growth beating inflation for the first time since the post-coronavirus economic recovery began in the second half of 2020.
What is the reason for the disconnection? Constantly high prices? Recession fears? The “vibecession”? Whatever the explanation, voters’ feelings about the economy — and President Biden’s handling of it — could potentially be decisive in the 2024 election.
A summer of strikes
The weekend of “Barbenheimer” followed close on the heels of a strike by tens of thousands of actors. They joined screenwriters on the picket line in July to stop Hollywood.
The strikes are part of a wave of labor activity in the United States this year, including targeted strikes by the United Automobile Workers union. Despite recent increases, overall union activity has fallen since the 1970s and ’80s.
Geopolitics has changed economic relations
Two wars highlighted the weakness of the global economic recovery and reaffirmed world trade relations.
Case in point: the geopolitics of oil. Prices rose above $120 a barrel after Russia’s 2022 invasion of Ukraine, then continued to fall amid rising US oil production and signs of a global economic slowdown. The Israel-Hamas war has sparked new fears that oil prices will rise and reignite inflation. Despite shipments through the Red Sea and Suez Canal, those concerns have yet to materialize.
In the Russia-Ukraine war, India and China emerged as the main beneficiaries. India, profiting from its neutrality, went from buying almost no Russian oil to buying almost half of what the country exports by sea. Trade between China and Russia has also grown, surpassing $200 billion in the first 11 months of this year.
The US and China remain deeply intertwined
Tensions between the United States and China appear to have stabilized after President Biden’s meeting with Chinese President Xi Jinping on the sidelines of the Asia-Pacific Economic Cooperation summit in November.
Economic ties remain strong, and new research shows how difficult it is to unwind them. Tariffs imposed by the Trump administration and other trade restrictions have caused China’s share of exports to the United States to fall in recent years, while countries such as Mexico and Vietnam have gained ground.
But those countries import intermediate goods from China, meaning American supply chains remain dependent on Chinese production. In fact, China is now the dominant supplier of industrial inputs, according to calculations in a recent paper.
Another reason why the United States cannot easily “decouple” from China: semiconductors. China is a major market for these advanced computer chips, which can be used to power artificial intelligence systems. This fall, the Biden administration tightened its export controls on semiconductors, making it harder for US companies to sell them to China. But big chipmakers like Nvidia are already working on modified chips to sell in Chinese markets, hoping to avoid the restrictions.
AI investment has increased
This year has seen an explosion of investment in generative AI start-ups, including Microsoft’s $10 billion backing of OpenAI, announced in January. Microsoft’s relationship with OpenAI has come under scrutiny, particularly its role in reinstating Sam Altman as CEO of OpenAI after a boardroom coup that caused a tumultuous five days in the startup. On December 27, The New York Times became the first major American media organization to sue OpenAI and Microsoft over AI-related copyright issues, saying in the lawsuit that the companies should be held liable for “violating lawful copying and use of the distinctive features of The Times. important works.”
Despite this, investment in this area of tech is booming.
Microsoft and Nvidia, the chipmaker, are two of the “Magnificent Seven” tech stocks that have contributed to this year’s stock market rally.
Over the course of the year, the S&P 500 went on a bull market rally that surprised many on Wall Street.
How long does it take? That’s a question for the next 12 months.
