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2022 was a bad year for stocks — one of the worst in history.
Often, the year following a crash is a great time to buy. After all, the point is to buy low and sell high. In addition, it is rare for the market to post consecutive annual losses.
As such, I’m staying out of the mix, at least for the first few months of 2023.
The possibility of a recession grows as high interest rates and inflation continue to eat away at corporate profits. Consumers don’t feel so confident in the economy, and neither do company CEOs, which means consumers and companies tend to cut spending.
Economists weren’t happy either. From a recent article on Reuters:
“A Reuters poll of economists was published in [Dec. 8] showed that US economic growth is expected to slow to 0.3% in 2023 following a 1.9% gain this year. It also represents a 60% chance of a US recession next year.”
Where did the market go?
Like most investors, I haven’t had a good year in the market. However, I’ve had a great year predicting where the stock market will go, as well as telling you what to do. For example, from my November 11 column, “Beware of the Recent Rally“:
“At the close on November 11, the S&P 500 was at 3,993. While the rally may continue for a while, I suspect the S&P will not surpass 4,100 to 4,200.”
Sure enough, the market continued to rise after I wrote that, but the rally stalled around 4,100. On December 30, about 3,820.
But that’s now. What about 2023?
I’ve never seen so many Wall Street strategists make predictions quite the same — namely, that we are in a shallow recession during the first half of 2023 that will cause stocks to crash, followed by a recovery in the second half of the year. because the Federal Reserve stopped raising interest rates and may start lowering them.
Check out this list of investment strategists. They all predict the scenario I just described: The market drops 10% to 25% in the first half, then recovers and rebounds, with 2023 ending slightly or even up.
However, there’s something you should know about consensus: It’s rarely true.
At the start of 2022, the average analyst sees the S&P 500 rising to 4,950 by the end of the year. They lost more than 1,000 points.
I won’t be guessing where the market will go in 2023 until I see how things go. I suspect rates will remain higher for longer than most experts expect, which could mean a further recovery than many expect.
Where you should, and shouldn’t invest
While I won’t express any degree of certainty regarding the market as a whole, I will predict the types of investments that could outperform, or underperform, in the current environment.
My advice:
Don’t invest in companies that don’t make money. The more profit a company generates in relation to its share price — in other words, the lower the price/earnings ratio — the better.
A company that hasn’t turned a profit isn’t a good bet when prices are rising and the economy is sinking. That’s why companies that performed so well as post-pandemic rallies roared in so badly in an environment with the current rate of gains.
Example: Carvana, a company with used car vending machines, has never made any money. It reached $360 in 2021. It was recently trading at $4.50.
Don’t invest in technology. Technology stocks have taken a hit this year, with the tech-heavy Nasdaq composite down more than 30%. I love investing in technology (my largest holdings are parent Google, Alphabet, Microsoft, and Apple). I also like to buy when prices are low. But for the first part of 2023 at least, I expect this stock to underperform the market.
The reason is that Big Tech stocks are still trading too high relative to their earnings. Earning estimates for many technology stocks will likely be reduced, leading to lower share prices in the coming weeks.
To be clear, I’m not selling my tech stocks, but I’m not adding them either. Great company, not the right time to buy one. When the market dips, which I expect to be around 3,000 to 3,300, I’ll re-enter.
You can view my entire portfolio here.
Don’t invest in consumer wisdom. Consumer discretionary companies, as the name suggests, are companies that offer goods and services we don’t really need. They don’t do well in a bad economy, because that’s when we use discretion when parting with our hard earned money.
The group will include retailers such as Macy’s and Home Depot, as well as companies such as Disney and Harley-Davidson.
The Pioneer Consumer Discretionary ETF is down about 35% so far this year. I expect the relatively poor performance to continue, although as the economy turns this will be a great place to be.
Invest in consumer staples. As the name implies, these are companies that make money in all kinds of markets, because we need what they sell. They include drug companies such as Eli Lilly, as well as companies such as Walmart, Kroger and Procter & Gamble.
The Vanguard Consumer Staples ETF has not dipped at all this year. It’s actually up about 1.3%.
Invest in the industry. While technology stocks are overvalued and likely to remain out of favor for most of 2023, industrial stocks are the opposite: cheap and gimmicky. Industrial stocks are shares of companies that make and move goods, such as Boeing, Honeywell, Raytheon Technologies, UPS, and Caterpillar.
The Vanguard Industrials ETF is down about 8% this year, but there will be a boom in infrastructure spending. It will help this group.
Oil stocks can also be included in this group. I have a lot, which makes a bad year not so bad. The Vanguard Energy ETF is up about 62% this year.
Invest in small capitalization. Small companies often outperform large companies, especially after emerging from a recession. Small cap companies (short for “small cap”) are now more undervalued than large corporations were for 30 years.
I have the Vanguard Small-Cap Value ETF. It’s down about 9% this year.
Invest in bonds. Which is better: Making a solid, guaranteed 4% to 5% in Treasury bills, notes and bonds, or losing principal in a bad stock market?
If you’re an income investor, the last 10 years have been a nightmare, with almost zero savings rates. The sun is now shining; it’s time to make hay. As I said a few months ago in “Don’t Think About Buying a Bank CD. Here’s the Reason“:
“This year has brought big changes in the financial market. The Fed’s attack on inflation has paralyzed the stock market, but it’s created a level of savings we haven’t seen in years. When times change, we must change with them. I’ve been investing for 40 years, but made my first Treasury purchase about a month ago. Take a few minutes to explore what’s out there.”
If the economy sinks, interest rates will likely sink too. Do yourself a favor and lock in a decent rate now. Invest in some short term bonds, but also some long term bonds or bond funds.
Bonus: Despite the high rates it is also a great time to invest in an annuity. For further explanation, see “Considering Annuity? Now is the Time to Act.”
And now for my standard disclosure: First, I’m using Vanguard funds in this column just to illustrate how different sectors are performing. It’s not necessarily the best ETF, and I don’t recommend it particularly. Do some checking; there may be better.
The most important: This column was written to tell you what I think and do, not to tell you what you should do. In short, it is not investment advice. Like I said, I’ve been doing this for over 40 years, but I don’t always get it right. Do your own research, make your own decisions, and be in charge of your own money.
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About me
I founded Money Talks News in 1991. I am a CPA, and am also licensed in stocks, commodities, principal options, mutual funds, life insurance, securities supervisors, and real estate.
