| | | | | | | Presented By Advisor | | | | Axios Markets | | By Matt Phillips and Emily Peck · Jan 03, 2023 | | 🍾 Happy New Year and welcome back! We missed you. - While we were out, disgraced FTX founder Sam Bankman-Fried was extradited to the U.S., and then released on a $250 million bond to his parents' house in Palo Alto, California — later today he's expected to plead not guilty to all charges in a court hearing. Stay tuned.
Today's newsletter is 1,166 words, 4.5 minutes. Let's go! | | | | | | 1 big thing: Here we go again |  | | | Illustration: Brendan Lynch/Axios | | | | After one of the ugliest years in recent market memory, strap in for 2023, Matt writes. The big picture: The path of markets this year hinges, as always, on economic growth, corporate profitability, and — most importantly — whether inflation abates and the Fed can stop raising interest rates. Flashback: It was exactly a year ago — Jan. 3, 2022 — when the S&P 500 topped out, hitting a record closing high of nearly 4,800. - Then a series of overheated inflation readings prompted the Fed to jack up rates at the fastest clip since the late 1970s, clobbering the stock and bond markets.
- The S&P fell 19.4% in 2022, the market's worst showing since 2008.
State of play: The key question in 2023 is whether efforts to rein in inflation push the economy into a downturn. What they're saying: Some well-respected analysts think that's a distinct possibility, which suggests more tough sledding to come. - "We continue to think that the near-term path for equity markets is likely to be volatile and down before reaching a final trough in 2023," Goldman Sachs analysts wrote in a recent note.
- Over at JPMorgan, analysts wrote: "As we approach 2023, we see a growing recession risk. In fact, our view is that market and economic weakness may occur in 2023 as a result of central bank overtightening."
Yes, but: Of course, Wall Street analysts can't tell the future. Here are some of the key issues that will determine the trajectory of the economy and stocks over the next year. - Inflation: This is the mother of all issues. Most seem to think U.S. price increases peaked in recent months and will keep slowing down. If that's true, it should help stocks shake off the worst of the bear market worries.
- The Fed: If inflation slows, how will the Fed react? Will it merely pause interest rate increases, or could it actually start to cut? Expect a massive rally if investors start to sniff coming rate reductions.
- The world economy: Europe is on the brink of recession due to the Russian energy shock. China's challenges with COVID and its ailing housing market have pushed growth down sharply there.
- The U.S. economy: It's possible the Fed's rate hikes — which can take a long time to affect the economy — could bring on a recession, which would hurt corporate earnings and weigh on investor sentiment.
The bottom line: After 2022, starting another calendar year can feel like a fresh start. But the truth is, investors continue to face the same issues — the path of inflation, the Fed, and the economy — that brought on the bear market in the first place. |     | | | | | | 2. Catch up quick | | ✨ The Consumer Electronics Show hopes to draw at least 100,000 in-person attendees, still well below its pre-pandemic peak. (Axios) 💰 SpaceX is raising $750 million at a $137 billion valuation. (CNBC) 📈 Soaring costs threaten to derail U.S. offshore wind projects. (WSJ) | | | | | | | | 3. 2023 is the year of salary transparency |  | | | Illustration: Brendan Lynch/Axios | | | | New laws went into effect in California and Washington state on Sunday requiring employers to post salary ranges on job listings, following similar legislation enacted in Colorado and New York. Why it matters: New York and California are major employment hubs for big companies, and have outsized influence when it comes to standard-setting for employers. Expect to see this catch on widely in the new year, Emily writes. - Plus: These laws shift the balance of power in the fraught and mysterious world of pay negotiations — giving job candidates and employees info that's typically closely held.
By the numbers: Companies moved fairly quickly to add pay ranges to job listings in New York City after the law went into effect in November; though some have been slow to adjust. - As of Dec. 4, 61% of NYC listings on Indeed.com included salary information, up from just 27% a month before the law change, according to the company's data.
Between the lines: Some companies were afraid to go first, fearing backlash over salary bands that might seem too broad or low, said Kaitlyn Knopp, founder of Pequity, an HR software firm. - Others are just not doing it; unafraid of the fairly weak enforcement mechanisms for the law.
- Also, updating listings takes time. Human resource and payroll teams are still pretty burned out by the turmoil of the past few years, she said.
- They're also worried that if a recession hits, they'll have to lower the ranges. "That's going to be painful."
| | | | | | | | A message from Advisor | | Never make another financial decision alone | | |  | | | | We all have that sinking feeling we're missing out on opportunities with our money. Advisor.com offers expert financial planning and investing for a flat annual fee. Whether you have $0 or $1M in investments, you pay one rate for the same white glove service. Take our quiz to see if you need an advisor. | | | | | | 4. LBOs just had a huge year |  Data: Dealogic; Chart: Axios Visuals One of the big stories of 2022 was the collapse in deal activity. IPOs, M&A, and corporate bond deals all shriveled as rising rates and economic uncertainty clobbered markets, Axios' Kate Marino writes. - But, but, but: Remarkably, private equity buyouts just wrapped their second-busiest year in more than a decade — check out that chart above.
The big picture: This is one example of the explosive growth of private markets — for both equity and debt — a trend that was well underway even before the pandemic. How it works: PE firms raise money from institutions and wealthy individuals, and in turn, use those funds as down payments to buy companies. - They typically borrow heavily from investment banks to cover the rest of the purchase price for these deals, known as leveraged buyouts (LBOs) — just like a mortgage on a home.
By the numbers: PE deal volumes were, of course, down from 2021 — a year that may, in time, turn out to be a colossal Fed-driven anomaly. But last year's U.S. deal value was still 61% higher than the pre-pandemic average (2013-2019). What happened: PE funds are sitting on record dry powder that they need to deploy into deals — and public companies got a whole lot cheaper to scoop up during 2022's bear market. - Plus: Private debt funds stepped in to finance the deals when the corporate bond and bank loan market started to seize up around midyear.
- The private debt market "is definitely what kept LBO volume going in Q3 and Q4," Susan Kasser, Neuberger Berman's co-head of private credit, tells Axios.
- As PitchBook wrote last month: "Of the 26 take-privates announced in the US and Europe since early June 2022, not a single one has been funded by banks; they are relying instead on private debt funds or all-equity structures."
What we're watching: The environment may be A-OK for acquisitions, but PE returns are all about the exits — and that's a little tougher, considering falling valuations and the state of the IPO market (see the eye-popping chart below). - PitchBook estimates that PE exit activity — when firms sell a company and actually realize a profit (or loss) — last year fell to a low not seen since the financial crisis.
| | | | |  | | | | If you like this newsletter, your friends may, too! Refer your friends and get free Axios swag when they sign up. | | | | | | | | 5. Charted: IPO cliff |  Data: Dealogic; Chart: Axios Visuals For companies, the prospect of IPO-ing into a bear market last year was, well, not that attractive. What happened: "Volatility mixed with cowardice," as Axios' Dan Primack described it. - What's next: There's not much in the IPO pipeline. Don't expect a recovery until at least the second half of this year, he writes.
| | | | | | | | A message from Advisor | | Never make another financial decision alone | | |  | | | | We all have that sinking feeling we're missing out on opportunities with our money. Advisor.com offers expert financial planning and investing for a flat annual fee. Whether you have $0 or $1M in investments, you pay one rate for the same white glove service. Take our quiz to see if you need an advisor. | | | | Was this email forwarded to you? Sign up here to get Axios Markets in your inbox. Today's newsletter was edited by Kate Marino and copy edited by Mickey Meece. |  | | Why stop here? Let's go Pro. | | | | | | Axios thanks our partners for supporting our newsletters.
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