A well-known economist on Wall Street predicts that the ongoing economic downturn is now transforming into a period of economic growth, suggesting that stocks might experience a rally in 2023. Moreover, this rally is expected to extend beyond the large technology companies, reaching other sectors in the latter half of the year.

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Ed Yardeni, the president of Yardeni Research, stated in a phone interview on Friday that in order to determine if there is a continuous economic growth, it is important to examine the industries and sectors that have been experiencing a decline. These specific areas are now exhibiting indications of recovery.

Yardeni highlighted the impact on the housing industry. Last year, the rise in interest rates led to a decline in single-family housing sales due to the increase in mortgage rates. However, the sector has since recovered well as homeowners have been reluctant to sell, resulting in limited supply. The pent-up demand has driven the sector’s strength, including home builders, despite mortgage rates rising close to 7%. As a result, the focus seems to be shifting towards the manufacturing sector, according to Yardeni. Retailers have made progress in reducing their excessive inventories accumulated in late 2022 and early 2023 due to over-ordering during supply-chain disruptions. Yardeni anticipates that forthcoming purchasing managers index readings will soon indicate signs of improvement.

Yardeni predicts that while the sun won’t shine on all aspects of the economy, commercial real estate will face a significant downturn, primarily affecting outdated office buildings.

He stated that sectors such as malls, hotels, and warehouses will not experience significant growth, but they will also not decrease in size.

According to Yardeni, the current situation allows for the economy to maintain a moderate pace without entering into a recession. A recession, as defined by the National Bureau of Economic Research, is a significant and prolonged decline in economic activity that affects multiple sectors of the economy.

Investor sentiments regarding a recession in 2023 have fluctuated. The concerns arose when Silicon Valley Bank and other local lenders collapsed in March, triggering worries about a credit squeeze that could hasten the economy’s descent into a recession. This was compounded by the delayed impact of the Federal Reserve’s rapid sequence of interest rate hikes starting in March 2022.

The labor market, which has started to calm down but is still strong compared to previous times, along with steady consumer spending, is alleviating concerns of an upcoming recession. Experts claim that diminishing worries of a recession have contributed to the ongoing stock market rally in 2023, resulting in a nearly 16% increase in the S&P 500 during the first half of the year.

According to Yardeni, consumers continue to have significant financial resources. He pointed out that interest income, dividend income, rental income, and proprietors income are all currently at their highest levels ever. Additionally, Yardeni mentioned that Social Security payments are also at an all-time high.

In contrast, Yardeni had previously stated that the economy had experienced the previously mentioned cyclic recession, but he currently believes that it is transitioning into a cyclic period of growth.

There is concern that the Federal Reserve will have to continue raising interest rates more than what investors and policymakers currently anticipate. According to an expert, the majority of the inflation increase seems to be a result of the impact of the pandemic, indicating that a recession is not necessary for inflation to decrease. In fact, there may be indications of a trend towards decreasing inflation, with the inflation of goods approaching zero, durable goods inflation becoming negative, and significant declines in prices of non-durable products like food and energy, while inflation in services continues.

In the latter part of 2023, the stock market’s rally is expected to expand gradually, leading to a more diversified growth. So far, the market has mainly seen gains in large technology stocks, with only a select few (“magnificent seven”) contributing significantly to the overall gains of the S&P 500 index.

In fact, most stocks have not performed well. A measurement of the S&P 500 called equalweight, which gives equal importance to each component rather than based on market value, only increased by 6% in the first six months. The Dow Jones Industrial Average, which focuses more on cyclical industries, only saw a rise of 3.8%.

Yardeni mentioned that it is clear that the leaders are becoming more expensive.

However, artificial intelligence is causing a fresh wave of industrial transformation that is still unfolding. According to him, investors will show enthusiasm towards companies that are not directly involved in creating technology, but are utilizing it to enhance their productivity.

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