Market strategist details 3 investment predictions for 2023

Baird Managing Director and Market Strategist Michael Antonelli joins Yahoo Finance Live to discuss the expectations for the Fed going into 2023, bond yields, inflation, bond yields, FAANG stocks, and the outlook for markets.

Video Transcript

[AUDIO LOGO]

JULIE HYMAN: Let's continue our conversation now on what to expect in the coming year of 2023. The Fed set to pivot away from hawkishness next year, but the turn in policy comes as the market finds itself in a very different place from the staggering growth we saw in the decade starting in 2010.

Here with more is Michael Antonelli, Baird Managing Director and Market Strategist. And, Michael, you're stepping out in front of it, I guess, and offering some predictions. Always risky, as we know, but--

MICHAEL ANTONELLI: Yeah. Yeah.

JULIE HYMAN: --but they're--

MICHAEL ANTONELLI: Yeah.

JULIE HYMAN: --they are important to do, and also can be fun to do. So your first prediction for the next year does have to do with the Fed and its timing. Talk me through what you expect.

MICHAEL ANTONELLI: Yeah, definitely going out on a limb here. Predictions are part of a strategist's job, but ultimately, just trying to make really good guesses, trying to make really good probabilistic views. So I think the Fed's done hiking at the next meeting. This is a little bit out of-- a little bit out of consensus. I think they're done at the next meeting. That would be the Feb 1 meeting.

And I think they're going to end at 450 to 475. I think that's where they'll end. We're at 425 to 4 and 1/2 right now, so that's a 25 basis point hike. And I think we get one more CPI report, I think that will be enough for them to say, OK, we need to see what the effects are of these hikes. So that's my first kind of prediction for next year is that one more CPI report, one more Fed hike, and then they hit the pause button.

JARED BLIKRE: All right, Michael, got to-- by the way, great to see you here.

MICHAEL ANTONELLI: Yeah.

JULIE HYMAN: Got to get to prediction number two, and this has to do with yields and inflation. Now, a lot of analysts for-- over the last month or two been tripping over themselves to declare the end of the bout of inflation, say it's going to come down precipitously, some not so much thinking that it will fall fast. But if inflation does fall, what happens to yields because I think that's the crucial differentiator here?

MICHAEL ANTONELLI: Right. So my second prediction kind of goes around yields and inflation. I do think inflation falls. I think it continues to fall for all the reasons that we've already seen it falling, auto prices, commodity prices, oil prices. Remember, shelter lags. We'll start to get that shelter decline next year. So that's when inflation, I think, really starts to fall.

I think if yields stay high, which is that I don't think as inflation falls we see yields just go down with it. I think what you're going to see is yields kind of stay higher. And that's a good investment thesis, I think, for individuals next year. So look into the bond market. Is there anything I'm missing from the bond market?

And if I'm right and yields stay high in that kind of 2010's mindset of low yields doesn't come back, then FAANG stocks aren't all that interesting either, right? Now you're looking at those tech stocks and saying, maybe I can't hide out in those and just wait for the market to go higher. I think exploring the bond world will be my second prediction next year. I think a lot more people will be doing that.

JULIE HYMAN: Yeah, certainly a lot of people have been talking about that, Mike. The other thing that you're looking for is gains in stocks in 2023. You're not alone there. The average forecast I'm looking at is about 4,009 for strategists surveyed by Bloomberg. So a gain but another sort of meh year expected.

MICHAEL ANTONELLI: So the stock market, it's very rare for it to go back-to-back negative, very, very rare. It's only happened a couple of times since the end of World War II. It didn't happen after '07. And '07 was a terrible, terrible year, and it didn't happen after then. So I'm playing the odds here. The odds of any given year being positive are about 70%, 74%, 75%, so I'm playing that.

I do think that, again, the stock market is all about are things getting better, are things getting worse. I think they will get slightly better next year. I don't think we get any big gains. But I do think next year will be somewhat positive. And again, that is almost playing the odds more than anything. It's not really playing a macro theme. It's playing a theme that it's very rare for the stock market to be negative two years in a row.

JARED BLIKRE: All right, Michael, before you go, and we've got time for one more here, where do you see the best opportunities for the new year, any particular style sectors you're liking based on the setup right now?

MICHAEL ANTONELLI: I still like defense. I think defense is a great sector that's got tailwinds to it that are kind of geopolitical that aren't necessarily about rates or yields or anything like that. And I also do like-- I do like housing to come back.

Housing is one of those things that you might say, why would you do housing when rates are high? There's just kind of a real endless demand for housing. And we're going to have to meet that in this country. So I would stick with housing and defense would be my two-- my two for the next year.

JARED BLIKRE: All right. Really appreciate you stopping by here. Michael Antonelli, Baird Managing Director, Market Strategist. Thank you.