Reviewing 2022 | Market expectations for 2023 | Stories of Note
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| Investors are weary of riding the bear market and continue to dream of a bull market somewhere in an uncertain future [Original image ©freshidea/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com] |
Can you think of any better representation for the stock market near the end of 2022 than the above image? That really is the wonderful thing about abstract art- the viewer can make observations which seem most fitting to their current, transitory worldview. Is the bear swimming in the waters of recession; the bull a distant dream for the investor, who, incidentally, is precariously perched atop the bear for the ride? Is the bear running out of energy and sinking while wishful investors watch the bull rise in the distance? The near-uniform consensus expectation among experts for 2023 is recession. However, before we look ahead, let’s take a few minutes to appreciate what lies behind*. 2022 has upended the growth stories of the last several years, with the declines of post-pandemic kingpins (remember FANG? Facebook’s stock briefly pulled back to 2016 levels just last month, ouch!), paving the way for a rise in value and – dare I say it? – a return to fundamentals. Profitable companies with solid businesses are once again good companies in the eyes of investors!
Inflation reaching levels last experienced in the 1980s (the Volcker years; surely a spectre that haunts the dreams of the current Fed). An S&P 500 that suffered its worst first-half performance since the 1970s. Recession indicators flashing red across the board. Total unemployment readings at lows last seen in 2000? What a topsy turvy roller coaster of emotions this last year has been! Initially eager to discuss steep market losses at the gym and on the golf course, businesspeople slowly started avoiding the conversations altogether as weeks of downturns turned into months (“Don’t talk to them, they’re stock people- you saw what the market did this week!”). Another major surprise was how the Fed – a dry (if vital!) cog in the machination of the financial markets – became a well-recognized institution among the general population. When a family member (in this case an artist, no less) in casual conversation randomly comments on potential Fed action at the next FOMC meeting, we know something strange is happening in the world.
The stock market’s struggles in 2022 revolve around the wrestling match between two gigantic opponents: collective price increases (inflation) on the one side, and the Federal Reserve on the other. Early in the year, the Fed realized too late that inflation was rapidly rising. And of course, inflation is an amorphous, obtuse thing: covering price increases in everything from rent to gas usage, basic grocery shopping to visiting the barbershop. The market has been largely in a wait-and-see pattern for many months: the Fed hikes rates, then all market participants examine various flavors of inflation reports to try to divine what happens next. The Ignorant Investor’s last post, which can be viewed using this link, effectively summarizes what has been happening over the past year.
The Crystal Ball: Managing 2023 Expectations
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| 2023 fast approaches! [Image © Urupong/ Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com] |
And what are the expectations for 2023? Inflation is likely to remain obstinate and drive market action, at least during the early months of the year. Global growth will slow, exacerbated by hawkish central bank policies and continued supply chain transformations. Valuation concerns will continue to loom as earnings appear set to deteriorate. Then of course, geopolitical concerns can always flair up.
Let’s not sugarcoat it: the economic outlook for 2023 isn’t great. In the USA, you have a Fed doing all it can to alter consumer spending habits and reduce employment (i.e. the FOMC hiking Federal funds rate while anxiously perusing inflation readings). And the stock market has already stumbled, with many pandemic darlings down 90%, and in some cases even more, from their all-time highs.
Banks and big money managers have invariably been pointing to recession next year and predicting downwards and upwards action in the stock market (in that order). These doom and gloom expectations make sense to The Ignorant Investor since the stock market – as a forward-looking instrument – usually bottoms out during a recession as opposed to before. This would indicate that if a recession is indeed imminent, some more pain may be necessary before the next bull market has a chance to begin.
But hey- who accurately predicted what 2022 was going to be like a year ago (okay, yes, Mr. Burry of subprime mortgage fame made some prescient remarks in November 2021- but besides him)? Stocks have by now sold off severely, and we are seeing considerable areas of frothy speculation implode (a la cryptocurrency space; as Warren Buffet famously observed, “You only find out who has been swimming naked once the tide goes out!”). The strong labor market may also soften the landing for the upcoming economic slowdown inside the United States.
This very low bar set for stocks in 2023 – in terms of pessimistic economic expectations, consensus negative stock market forecasts, and low stock market participation among money managers – may leave room for some pleasant, positive surprises. If the consensus always seems too far on one side of the boat, the contrarian in The Ignorant Investor is screaming to have some positions which benefit from an opposing occurrence (softer landing vs hard landing, to be clear).
All these dry details boil down to the same mantra The Ignorant Investor has been repeating throughout 2022: In the face of rampant uncertainty, companies with strong fundamentals and businesses that are relatively impervious to economic uncertainty will remain the gold standard for investment. Profitable corporations with solid balance sheets and compelling stories are, well, compelling! Are you looking for places to put your money to reap gains in 2023, 2024, and beyond? Then you are an investor, and for investors, opportunities abound. Your financial advisor will be able to work with you to compile a quality buy list with desirable entry prices!
Stories of Note
Republicans gain control of the House in Midterm elections
Voters came out in strength on November 8th with several major issues on their minds (from polls, this appeared to largely boil down to high inflation and the recent overturning of Roe v. Wade). Surprisingly to some observers, there was no Republican “Red Wave”, although they did gain control of the House. Political gridlock in Washington is nothing new and is historically beneficial to the stock market. Besides this, the weary expectation that Congress won’t get much done anyway certainly won’t change with this result. USA Today has a summary of how a split Congress tends to affect the stock market in this article here.
Strong legislative support for renewable energy through the August passage of the Inflation Reduction Act
The dramatic reversal by Senator Manchin to suddenly bring life to the bill in late July – after persistently dismissing it over previous months – came as a surprise to observers. Many clean energy companies have seen their shares rise considerably since the bill’s passage, with one big solar beneficiary more than doubling since the bill’s revival. While some particulars concern Europe on a competitive advantage basis, the end result will be more dollars towards the renewable energy industry and (hopefully) their corresponding R&D departments. Reuters has a solid article outlining exactly what is in this bill and how it will benefit renewable energy development; you can read the article using this link.
California regulators seeks to curb compensation for solar power users
Solar power use in California is largely concentrated among the affluent, while disadvantaged families often have no choice but to rely on the regular electrical grid. Under the current system – which has largely driven solar panel growth in the state over the last several decades – solar customers have the option to send excess power to the electrical grid in exchange for compensation. California regulators seek to reduce this compensation (with their most recent November 2022 proposal an improvement on an earlier December 2021 draft, which had experienced massive political pushback). It will be interesting to see how this unfolds in the face of numerous State-backed climate initiatives to reduce carbon emissions (especially since the regulator missed their self-imposed deadline to announce their newest draft proposal; I mean, it’s not like they would purposely wait until after elections to make this change and thus sidestep voters, right?). The New York Times has an excellent summary article about the facts (and without the above speculation) which can be read using this link.
*Yes, the year is not yet finished, but this will likely be The Ignorant Investor’s last post of substance for the year!
Note that our updates have been less frequent this year as volatility has increased. It’s not that things aren’t happening- it’s that the actual commentary about what to do remains relatively consistent: look to quality names in specific business arenas to weather the downturn!
