Having come off an extremely challenging year, there are some signs that 2023 will be a lot better for investors, particularly for shareholders of stocks like Boeing (BA -2.87%), Raytheon Technologies (RTX -0.35%), and General Electric (GE -2.11%). All three stand to outperform in a market that could surprise on the upside. Here are three reasons why.
Interest rates could start to come down
Markets are always volatile when the Federal Reserve is in a tightening cycle. There's no end to the discussion of impending recessions, and no one knows just how far the interest rate hikes will go. Moreover, rising interest rates make investment and spending more expensive, which usually means slower growth and pressure on company earnings.
That said, the implied view from the bond markets is that rates could be lower in a year. We know this by looking at market rates on U.S. Treasury Bills. As you can see below, longer-dated debt (in this case, 10-year Treasuries) usually commands a premium rate over short-dated debt, because investors want to be compensated more for lending over more extended periods.
However, over the last six months, that relationship has reversed (the so-called inverted yield curve), implying that bond investors believe interest rates will be lower in 10 years than they will be in six months, and lower in one year than they will be in six months.
Data by YCharts
A more benign interest rate outlook will make it easier, for Boeing in particular, to restructure its debt and make equities relatively more attractive as an asset class.
Data by YCharts
While an inverted yield curve also implies a sharp economic slowdown, this has posibly already been priced in with the 19% decline in the S&P 500 in 2022.
An easing of the supply chain will help
I think Boeing, Raytheon, General Electric, and others can do relatively well in an environment of slowing growth because they tend to sell long-cycle equipment (aircraft, engines, military hardware, gas turbines, and wind power turbines). There's no issue with the backlog for Boeing (it has a backlog of 3,510 Boeing 737s and 413 Boeing 787s), while GE Aerospace alone had a more than $300 billion backlog earlier in the year, and Raytheon has a $186 billion backlog.
There's no issue with demand for Raytheon's aircraft engines and military equipment. In fact, its most significant issue in 2022 was executing on that demand in light of ongoing supply chain component and labor shortages.
As the economy slowly works through supply chain logjams, Boeing, Raytheon, and General Electric (all of which got hit by these issues in 2022) should see year-on-year improvement as they seek to ramp up production of aircraft, engines, and military equipment.
Indeed, Boeing's CEO believes that an economic slowdown could be good for Boeing because it will make skilled labor more available. Raytheon's CEO Greg Hayes has made similar comments.
Deflation is in the system
Lower prices for things like transportation and raw materials are in the pipeline. The chart below shows a clear downtrend in month-over-month and year-over-year producer prices.
Data by YCharts
In addition, a closely followed gauge of manufacturing conditions, the Institute for Supply Management report on business, reported its lowest number for prices paid by manufacturers since May 2020, with 87% of respondents saying the same or lower prices.
A price correction in raw materials and transportation is good news for most companies, notably heavy manufacturers like Boeing, Raytheon, and General Electric.
A bull market in 2023
If the bond market is correct, then the Federal Reserve's tightening could finish by the end of the year. Meanwhile, easing supply chain logjams and falling producer prices could see margins rising -- not least for the three companies discussed here (all of which have substantive backlogs to execute on next year).
All told, there's plenty of reason to stay positive about 2023, even if the near-term economic outlook is challenging.
