The stock market had its worst year since 2008. The S&P finishes 2022 down almost 20 percent. Corporate layoffs are starting to make headlines. The U.S. Labor Department report initial jobless claims rose modestly at the end of the year. However, unemployment remains historically.
The big question of 2023: are we going to be in a recession? Wall Street Journal reports that more than two-thirds of economists at 23 major financial institutions expect the U.S. to have an economic downturn this year.
Stock Market
Here is how the Dow and S&P finish 2022:
Dow
- Down 8.78% for the year
- Up 15.39% for the quarter
- Down 4.17% for the month
S&P 500
- Down 19.44% for the year
- Up 7.08% for the quarter
- Down 5.90% for the month
The sentiment moving into 2023 is that frustration is on the horizon. The Fed remains hawkish this year which drives investor sentiment. The markets react to news rather quickly. For example, in November when the CPI reading came in at 7.7% instead of 8.2%, we saw a huge move up.
If the Fed were to signal rate cuts, then the market would likely rally higher. For now, the signal is more rate hikes albeit smaller increases.
Interest Rates
The cost of borrowing nearly doubles in 2022. This is causing issues in the housing market. Buyers are having difficulty coming up with the seller’s asking price. Real estate prices in general are down across the board. 2023 will likely be a buyer’s market if interest rates remain high.
10-Year Treasury
The 10-year treasury yield opened slightly higher today at 3.869%. It is up almost 50 basis points from its recent low. This interest rate affects commercial real estate investors as they look to refinance in 2023. There are a lot of loans coming due in 2023.
Read More: Looming Multifamily Maturities in 2023
The forward curve on the 10-year treasury goes slightly lower at the beginning of 2023 and rises in the long term. However, the swings this year give you reason to believe that anything can happen. This is primarily because they are sold at auction. Demand is what drives the yield of these instruments.
Federal Funds
The current range of the federal funds rate is between 4.25% and 4.50%. Many are critical of the aggressive hikes, but inflation remains the top priority. If inflation readings remain elevated, the Fed will continue to raise rates despite the damage.
The latest market consensus is the next hike will be 25-basis points on February 1st. If inflation spikes, then it could be a 50-basis point hike. Expect federal funds to be around 5% by the middle of this year.
A pause is expected around the 5% target. Some are calling for a fed pivot, but many did not believe we could get interest rates this high. So, we will see what happens in 2023.
Multifamily
Asset prices on multifamily are down from the peak early in 2022. We can see some buying opportunities in 2023 for deals on short-term floating rates. This is on a deal-by-deal basis. The agency takeout on bridge loans was on a 3-year projection with rates around 4%, not 6%. Not all the deals will have enough NOI to refinance their current loan.
The multifamily deals on short-term maturities can extend, cash-in refi, or sell. One of the toughest challenges is the escrows for rate caps. Even if an owner wants to extend, the replacement rate cap has soared. It is about $1 million for a 2-year strike at 2% on a $20 million loan.
I think we are going to see a lot of multifamily owners opt to sell. Extending the loan is too costly and uncertain. Finding equity will be a challenge for many as well since the declining wealth effect has investors more cautious.
If they can shore up the borrowing costs and put in place a long-term solution, I think they will do great on the other side of these rate hikes.
Conclusion
Uncertainty rules the day for the state of the market. Macro events seemingly happen faster and more frequently causing volatility. The long-term outlook for investing always looks bright though. If you can handle the short-term choppiness and position yourself as a long-term investor, you will likely find great prosperity.
