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Published: Jan 09, 2023 7 min read

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Illustration of eyes watching the stock market for trends
Rangely García for Money

Between the uncertainty of the economy and geopolitical tensions, there's a lot for investors to watch this year.

And it comes after a wild ride for those watching the markets. After starting 2022 near an all-time high, the S&P 500 ended the year down 19.4% — the stock market's worst annual performance since 2008. The prices of other financial assets, like bonds and crypto, struggled as well amid high inflation and interest rate hikes from the Federal Reserve.

The stock market was also extremely volatile, with a frequency of intraday swings of more than 1% not seen since the Great Recession.

So what's in store for the stock market in 2023?

"The markets will be very volatile," predicts James Angel, a finance professor at Georgetown University. "There are a lot of things which could move the market."

Experts say there are five factors affecting the stock market that they'll be monitoring this year.

1. Inflation

In an effort to bring down decades-high inflation, the Federal Reserve hiked interest rates throughout 2022, most recently by a half percentage point in December. That brought the federal funds rate to a target range of between 4.25% and 4.5%.

The higher interest rates are, the more expensive it is for consumers and businesses to borrow money. That can in turn cramp consumer spending and help lower inflation. But higher borrowing costs also mean businesses are coping with increased costs while consumers have less to spend, which can hurt companies' earnings and how they're expected to do in the future, bringing down stock prices.

All eyes have been on the central bank ever since it became clear it was planning on upping interest rates. While the last interest rate hike was smaller than the previous four (which were all hikes of three-quarters of a percentage point), Fed Chair Jerome Powell has indicated that ongoing increases will continue. So what does this mean for 2023?

"The most important focal point and greatest importance to capital markets continues to be the Federal Reserve's battle with inflation," says Bill Northey, senior investment director at U.S. Bank Wealth Management. While inflation has begun to show some signs of peaking and declining, it remains much higher than the level that will allow the Fed to move back to a more neutral monetary policy, he adds.

In other words, investors can expect more Fed rate hikes ahead, and likely more struggles in the stock market.

2. The U.S. labor market

The biggest factor the Fed will be watching is the labor market, says Ross Mayfield, investment strategy analyst at Baird. The Fed's basic thesis is that a very tight labor market is causing upward pressure on wages even as the economy slows, and that's feeding into price inflation overall, he adds.

Even if most inflation indicators are headed in the right direction, if the labor market remains as tight as it is today, the Fed's messaging indicates that it will remain hawkish, Mayfield told Money Thursday. ("Hawkish" policy refers to aggressive policy, like higher interest rates.)

The U.S. labor market added 223,000 workers in December, according to data from the Labor Department released Friday. Job growth decreased slightly from November and wage growth slowed, a sign that the Fed's moves are having an effect, but that the labor market still remains strong.

Mayfield says his firm will be closely eyeing the labor market in 2023.

3. China's economic reopening

China has one of the biggest economies in the world, and it heavily impacts global markets. After years of a strict zero-COVID policy, the Chinese government recently removed many requirements and has been generally relaxing rules as it works to reopen its economy. But experts say it could be a long and bumpy road to recovery for the country's economy.

China is the globe’s largest consumer of commodities, and stringent lockdowns impacted production, put strain on global supply chains and helped ease some of the price pressure on commodities at different points, says Matt Bacon, a financial advisor at Carmichael Hill & Associates, a financial planning firm based in Gaithersburg, Maryland.

"Reopening is likely to be inflationary as factories fire back up and demand for raw materials picks up pace," Bacons says. "We could also see a big upswing in consumer spending as people emerge from lockdown with pent up demand."

Just a few days into the year, China's policy changes are already shaking up commodity prices.

4. The Russia-Ukraine war

The war in Ukraine rattled financial markets in 2022, and market experts will continue to watch for effects this year.

There are economic impacts across Europe and more broadly, largely transmitted through energy costs and the impact to the European economy, Northey says.

The energy problems of 2022, like redirected Russian supply, are "likely to persist in 2023," Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a recent research note.

5. Deglobalization

One theme that Mayfield says may be being underassessed is deglobalization and the onshoring of supply chains — as in, bringing them to the U.S. He points to recent legislation, like the bipartisan infrastructure package and the Inflation Reduction Act, which address securing supply chains and investing domestically amid rising geopolitical tensions.

The Inflation Reduction Act, for example, will encourage more production of solar equipment at home with incentives for domestic solar panels and inverter manufacturing, David Sekera, Morningstar's chief U.S. market strategist, told Money when the initiative became law in August.

Mayfield says the themes of deglobalization and increased domestic production "will continue to gain traction this year as tensions abroad continue to ramp up."

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