2022 is over and today I am dropping in to share a review of the year and my outlook for 2023. 2022 was a tough year for stocks and bonds.
The tech-heavy NASDAQ 100 (QQQ) fell 33%.
The S&P 500 (SPY) fell 19%, its worst year since 2008.
The Vanguard Global Stock Market (VT) fell 20%.
While stocks struggled, bonds recorded one of their worst years ever due to the huge jump in interest rates.
- The Vanguard Total Bond Market ETF (BND) was down as much as 19% before closing down 15% on the year.
- The iShares 20+ Year Treasury Bond (TLT) was down as much as 37% before closing down 32%.
- iShares Investment Grade Corporate Bonds (LQD) were down as much as 25% before closing down 20% on the year.
These are enormous moves in the bond market and it led to the worst year for bonds in over 100 years according to a report from Forbes.
When you add historic weakness in bonds to weakness in stocks, 2022 was the worst return for a balanced portfolio (60% stocks, 40% bonds) in almost 100 years. According to a report from the Financial Times, 2022 was the worst year for a balanced portfolio since 1932 during the Great Depression. Take a look at the chart below – this is a good visualization of just how tough this year has been.
*chart from financial times.
It’s not pretty, but these are the numbers. And hopefully it provides everyone with some context on how challenging 2022 was.
However, here’s the good news. Bear markets lead to new bull markets.
In the short run I am expecting to see more volatility in 2023, particularly in the first half of the year. There are still plenty of speed bumps for stocks.
- potential recession in 2023.
- slow corporate earnings growth.
- inflation remains stubbornly high.
- war in Europe.
However, despite the challenges, there are some very good reasons for investors to be optimistic on 2023.
4 Reasons to be Optimistic on Stocks in 2023
Bear markets lead to bull markets: Even though they are painful, bear markets set the stage for bull markets that can last for years. History has shown this many times. Here are some more details from Yahoo Finance.
If there is anything to hang your hat on during the current bear market in stocks, it’s that longer term markets tend to rebound very nicely.
The S&P 500 has been higher three years later in eight out of nine cases in which the index has fallen 20% or more from an all-time high going back to 1957, according to research from Trust co-chief investment officer Keith Lerner. Stocks have returned on average 29% during those eight cases.
Interestingly, stocks have also sharply regained ground a year after falling 20% or more from a high. Lerner’s data shows the S&P 500 has increased 15% on average in the seven times stocks have tanked 20% or more from a high dating back to 1957.
*chart from Truist co-chief investment officer Keith Lerner.
Bear markets don’t last forever: According to most reports, bear markets usually last from 9-12 months. The S&P 500 has been in a bear market for 12 months and that tells me we are close to the end of weakness in stocks.
Interest rates should stabilize: The biggest reason stocks and bonds have struggled so much in 2022 is due to the Federal Reserve making some of the biggest hikes in interest rates ever. After all the increases, the Fed is almost done raising rates and that would be another tail wind for stocks.
Peak inflation: We are seeing more signs that inflation has finally peaked. Any good news on inflation is good for consumer spending, the economy and stocks.
Here is What I like in 2023
I am expecting a better year for stocks and bonds in 2023 – but I also don’t think this is a year to go hog wild with risk. Here is a list of my primary targets in 2023.
Index funds: a great way to get diversified.
Energy stocks: I expect energy stocks to hit a new high.
Food and agriculture: I expect another strong year for food stocks.
Bonds: Bonds are SUPER low right now.
What’s up with Big Tech?: Big Tech was THE trade for the last decade, delivering huge gains from 2010 to 2020. Now big tech is in a massive correction. When these corrections happen, they usually last for at least a few years. For example, when Microsoft shares crashed in 2000, it took 14 years for shares to hit a new high. I still like Big Tech in the long run, but in the short run l am looking to trim allocations.
Disclaimer: This is not investment advice. This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading.
