After two years of astounding returns (2020 and 2021), we saw the stock market come back to earth in 2022. It begs the question: what can investors expect in 2023? Read through the end of the article to see my analysis.
First off, let’s recap what worked and what didn’t work in 2022.
As you can see, there were some sectors that fared much better than others. For instance, Exxon Mobil stock went up over 70% while Amazon went down over 50% — previous losers became the winners and previous winners became the losers!
So what’s next? While impossible to predict the future, the stock market is heavily influenced by economic conditions- housing, interest rates, employment, etc. By examining current economic conditions and comparing them to similar times in history, we can get an idea of what to expect in 2023. As the saying goes, “history doesn’t repeat itself but it often rhymes.”
Let’s look at the current economic climate:
- A recent low in unemployment
- Fed near the end of tightening cycle
- High inflation relative to recent history
- Rapid decrease in housing starts and sales
- Inverted yield curve
I was able to find 4 historical time periods where these economic conditions were present. Let’s look at what the general stock market did during each of these periods…
July 1979 — May 1980 (Paul Volcker’s War on Inflation)
June 1990 — December 1990 (Bush Sr. Mild Recession)
November 2000 — September 2001 (Post Dot-Com Bubble Recession)
May 2007 — October 2008 (Beginning of GFC)
Hmmm….. not pretty! Perhaps this is why for the first time in decades, the majority of Wall Street strategists are predicting 2023 to be a down year for stocks!
It’s clear that the current economic climate is not conducive to an easy money stock market. We can expect volatility and uncertainty to prevail in 2023 as it did in these previous periods. But just because the overall stock market wasn’t great, that doesn’t mean there weren’t winning strategies. Let’s look at some things that worked in those environments.
- Gold and Silver. There were major rallies in precious metals back in 1979 and 2007 and I expect we could see something similar next year. But be prepared to sell — I don’t think the rally will last forever!
2. Battered Down Stocks. After the dot-com bubble burst in 1999, there were many stocks down over 90%. Booking.com (formerly Priceline) peaked at $950 and went all the way down to $7, and then bounced back to $50. 1–800-Flowers.com went from $20 down to $2 and then back to $15.
This past year, many stocks have fallen 80–90% from their highs. Now, that’s not a reason to buy because they can always go to zero. But I believe there will be opportunities in these beaten-down names when buyers return to the market. I have a watchlist of these companies and will be watching for signs of a bottom and recovery rally in 2023.
3. Peak Oil & Energy. Historically, we would expect to see oil prices peak and then begin to downtrend with recessionary forces. I think there could be more juice left in energy stocks early next year but I wouldn’t be too greedy.
4. Cash and Bonds. There is nothing wrong with holding cash in this environment. With the Dow at 33,000, there will most likely be opportunity to buy stocks at lower prices. Short-term bonds and CDs are currently yielding over 4% — which is modest, but nothing to scoff at in this market.
So how will we know the market has bottomed? Here are some indicators to watch out for in 2023…
- The Fed adopts a looser financial policy, cuts interest rates
- Unemployment rises above 4.5%
- Major sell-off in market indices with the VIX > 35
- Stability in tech and retail stocks
The green dots below represent major market bottoms (the best time to buy stocks) and how it correlates to both unemployment and the federal funds rate. As you can see, market bottoms occur after the Federal Reserve cuts interest rates and before unemployment peaks.
Personally, I think the 2020s will continue to be a turbulent time for financial markets. The buy-and-hold approach will not be as effective as it was in the 2010s. I encourage all investors to stay informed, stay nimble and be patient.