Cyclical Stocks to Outperform as Inflation Drops to 3.5%: Barry Knapp's 2023 Outlook

01/09/23 • 53 min

This podcast episode brought to you by Covey — Covey is designed to find, reward, and train the next top investment managers —from any background—that anyone can copy, so everyone can win.

Barry Knapp of Ironsides Macroeconomics rejoins the podcast to discuss his surprisingly sanguine view of the economy in 2023: Why cyclical stocks should outperform the technology and defensive sectors, and why he's expecting inflation to drop to 3.5% by the second half of the year.

Content Highlights

Inflationary recessions are different from deflationary ones. The last four were the latter. If there is a recession this year, it will be the former (02:18);
Earnings downside is limited in this scenario, by 5% based on what happened in similar situations in the past, and earnings should actually go up (5:56);
Tech margins should continue to be under pressure but economically-sensitive cyclical stocks should see margin expansion (10:50);
The US labor market has actually started to weaken considerably -- and not due to Fed policy (12:18);
There have been some big adjustments in the labor market post-pandemic (16:47);
The 'wealth destruction effect' from tech stocks selling off is negligible (27:35);
One point of concern: the deficit. This is where the implosion in wealth could affect things (32:59);
The coming budget battle in Congress is worth paying attention to (34:41);
The 'higher for longer' Fed interest rate hike thesis has gained traction. What this means for stocks (43:27);
Inflation: Expect 3.5% CPI by mid-year (47:37).

More Information on the Guest

Substack: Ironsides Macroeconomics;
Twitter: @BarryKnapp.

Not intended as investment advice.

This podcast episode brought to you by Covey — Covey is designed to find, reward, and train the next top investment managers —from any background—that anyone can copy, so everyone can win.

Content Highlights

Inflationary recessions are different from deflationary ones. The last four were the latter. If there is a recession this year, it will be the former (02:18);
Earnings downside is limited in this scenario, by 5% based on what happened in similar situations in the past, and earnings should actually go up (5:56);
Tech margins should continue to be under pressure but economically-sensitive cyclical stocks should see margin expansion (10:50);
The US labor market has actually started to weaken considerably -- and not due to Fed policy (12:18);
There have been some big adjustments in the labor market post-pandemic (16:47);
The 'wealth destruction effect' from tech stocks selling off is negligible (27:35);
One point of concern: the deficit. This is where the implosion in wealth could affect things (32:59);
The coming budget battle in Congress is worth paying attention to (34:41);
The 'higher for longer' Fed interest rate hike thesis has gained traction. What this means for stocks (43:27);
Inflation: Expect 3.5% CPI by mid-year (47:37).

More Information on the Guest

Substack: Ironsides Macroeconomics;
Twitter: @BarryKnapp.

Not intended as investment advice.

Previous Episode

Recession in 2023 Should Be Benign With Ample Job Growth: Alex Chausovsky

Alex Chausovsky, vice president of analytics and consulting at Miller Resource Group, rejoins the podcast to discuss his surprisingly upbeat economic outlook for 2023, driven by a healthy labor market in the US.

Content Highlights

There may be a recession in 2023 but the US labor market should hold up just fine (3:03);
The guest's assessment is due to first-hand knowledge as his employer is a recruiting firm. None of their clients are slowing hiring (5:37);
The trend is due in part to re-shoring of high-end manufacturing to the US, but also to non-US companies seeking to establish manufacturing centers stateside (7:46);
The Federal Reserve has been hiking rates aggressively and plans to continue this policy (albeit less aggressively) in 2023, but most of the damage may be done already (9:12)
With inflation abating there will be less impetus for the Fed to "truly break things" in 2023 (13:05);
Supply chain issues have mostly been resolved, with auto production and semiconductors especially benefiting. Further easing can be expected on the labor side (14:44);
One sector of the economy that is clearly poised to benefit: automation (16:56);
Background on the guest (22:56);
Housing has already contracted but this should turn around by the end of 2023 or early 2024 (31:32);
The outcome he's expecting in his native Ukraine (37:35).

More Information on the Guest

Website: MillerResource.com;
LinkedIn: AlexChausovsky;
Twitter: @AChausovsky (not very active).

Next Episode

China Reopening: Underestimating the Impact on Global Economy, Markets With Mike Edwards

This podcast episode was recorded Jan. 18, 2023, with a short clip of actionable highlights distributed to premium subscribers the following day. The full podcast episode followed a day after that. To become a premium subscriber and take advantage of this and a host of other benefits, visit our Supercast or Substack and sign up!

Mike Edwards, deputy chief investment officer at Weiss Multi-Strategy Advisers, joins the podcast to discuss China's post-Covid reopening and why its impact on global markets is not being fully priced in by investors.

Content Highlights

China's abrupt U-turn over 'Zero Covid' is unquestionably one of the biggest changes to take effect in the global economy over the last few months (2:23);
There have been reservations about this reopening, but it is happening with authoritative force and will have a major positive impact (5:08);
What about the US de-coupling from China and the embattled real estate sector? (11:00)
Where this will be felt most is in markets that have exposure to the Chinese consumer. It also points to Europe and emerging markets outperforming the US (17:54);
Chinese consumers were far more restrained than their US counterparts during Covid and have been slower to return -- especially tourists. This is not just a one-off in terms of the resurgence of Chinese travel and services (24:20);
What to make of the latest economic developments in the US, especially with the consumer? (27:31);
Weiss's house view is that the US will avoid recession this year (34:02);
Background on the guest (37:49);
China can re-emerge without the US as a major partner (51:36);
After some consolidation, the US economic and market cycle is marked by investors seeking to put money to work -- slowly (57:18).