Moreover, today’s valuations were reached during an unusual period: one in which central banks pumped endless liquidity into the market via quantitative easing (QE).
By buying government bonds with newly created money, the Fed and others depressed yields and nudged investors to seek returns in riskier assets, like stocks.
Now these QE programmes are being kicked into reverse.
One consequence is that governments will rely much more on private investors to hold their debt.
In the fiscal year of 2022-23, America’s Treasury may need to borrow almost twice as much from investors as it did during each of the two years preceding the covid-19 pandemic, and four times the average in the five years before that.
Even without central banks raising short-term interest rates, this glut could drive bond prices down and yields up.
Just as in 2022, stocks would therefore be left looking less attractive by comparison.
The final reason for gloom is a divergence between economists and investors.
Although wonks are betting on a recession, many punters still hope one can be avoided.
Markets expect the Fed’s benchmark rate to hit a peak of below 5% in the first half of this year, before declining.
The central bank’s governors disagree.
They project that the interest rate will end the year above 5%.
Thus investors are betting either that inflation will fall to target more quickly than the Fed expects, or that the monetary guardians do not have the heart to inflict the pain it would take to get it down.
There is, of course, a chance they will be proved right.
But markets spent much of 2022 underestimating the Fed’s hawkishness, only to be put in their place by Jerome Powell, the central bank’s governor, at meeting after meeting.
If the pattern repeats, 2023 will be another miserable year for investors.