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2023 Market Outlook: How Next Year Might Differ from 2022

Published 12/29/2022, 10:06 AM
Updated 07/09/2023, 06:31 AM
  • 2022 held a lot of hard lessons for investors
  • This bear market is unique, but that doesn't mean it will last forever
  • There is reason to think next year will be different

We are approaching the close of 2022, an extremely complicated but, in some ways, very instructive year.

First of all, looking at what has happened since January and October, we have had respectively the worst year for the bond market, one of the worst years for the stock market, the worst year for the 60/40 balanced portfolio, an inflation rise that eroded purchasing power (so even cash, in this case, was not spared), and only commodities and energy stocks that have held up with positive performance.

In addition to these asset classes, the US Dollar also performed well; this also weighed heavily on America's equities, however, as many companies get 50% or more of revenue outside the U.S. (several big tech companies for example).

The difficulty of this strange and peculiar bear market, in my opinion, has been twofold:

  1. Long duration: about 13 months (to date) versus the six weeks of the COVID decline in the first half of 2020
  2. Widespread decline in major asset classes (stocks and bonds)

2023: Some reasoning and insights

I always say in my analyses that no one can know what will happen one month or one year from now, but we can prepare strategies depending on the different scenarios we face.

The issues that affected the markets were different last year, including the conflict in Ukraine (especially for the European markets), inflation, and the Federal Reserve interest rate raises.

The November CPI index finally signaled the decline in inflation that the markets were so eagerly awaiting (not coincidentally, on that day S&P 500 jumped +5.54% and the Nasdaq +7.35%). The Fed, despite the sharp rises in 2022, should sometime in the first quarter begin to set the exit point of their very aggressive monetary policy. The Fed raised rates to 4.5% in December, and the so-called famous "pivot," should come between 5% and 5.5%.

In that scenario, with falling inflation, a softer Fed, and perhaps a weaker Dollar, we could see a recovery in all major asset classes, especially equities and bonds.

In particular, the same tech companies that were so penalized in 2022, could recover, as they have much better valuations today after declines of 50%, 60%, and even 70% in some cases. This is true even in the case of a recessionary scenario, a possibility many market participants are worrying about because historically such a situation would favor big tech companies anyway. So, I expect a good recovery if not for all of them, then at least for a good part of them.

As far as Europe is concerned, the banking sector, asset management, and the financial sector, in general, could be favored by a situation of higher interest rates which gives banks more margin to work with, as well as a market rebound in prices which could bring investors back into the markets and thus improve revenues and assets under management.

I close with the countries theme, where in my opinion China has been the big loser this 2022 because of the only recently ended stringent policies on COVID and the possible theme on Taiwan. The confirmation of Leader Xi Jinping has also generated several tensions. However, I think the Asian markets as a whole have been overly penalized, and therefore deserve consideration.

Finally, on the bond side, investment-grade bonds have become attractive again, especially if inflation does indeed return to lower levels and spreads tighten.

Latest comments

Looks like the pain is almost over, and 2023 will be a good year for stocks. And why it shouldn't? When everyone (CEO)is talking about recession, it means they already took some actions and made preparation for it. We had 2 consecutive quarter with negative GDP in 2022, and that should be the recession, in the past, retail sales does not look bad, 5.4% higher than 1 year ago, while the average yearly increase is at 4.7%. Inflation have 6 consecutive months of decreasing, and it looks it may get below 5% in next 4 months. I does not look like a recession is coming. I may be wrong or even stupid, but I do see a 20% increase in S&P for 2023.
REALLY GOOD ARTICLE FOR BULLS.
and packed full of pipe dreams.. wishful thinking that the bottom has hit and not even acknowledging a recession.
Making forecasts about how the markets will do is fruitless because all you need to look at are the Fed, Russia, and the political scoreboard. Don’t get me wrong, I see the markets growing 8-10%, the Fed rate at 4.5%, and the war ending mid-year. I also see Biden announcing that he will run again in 2024.I see labor remaining at full employment And GNP growing at 2-2.5%.
I'll see your 4.5% and raise you to 6%. Nobody is mentioning what the economy will be doing when the silver foxes get their huge COLA increases in January. That money will make a big difference on the Fed rate.
Don't the technical analysts/chartists see everything? Crazies. Morons.
This is the first positive piece i have read on this site in a very long time
This besr market is gar grom over until the Fed gets infkation diw to 3-4 % they still rsising interests rates even if its at a slower and less dramatic pace, nominal increase in interests rates will keep these markets down
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