The stock market forecast for 2023 is as varied and volatile as the market. Experts on Wall Street lost a lot of credibility in the attempt to project the financial markets last year in the wake of one of the most extreme correlations of stock and bond negative returns in history. We won’t take the easy way out in terms of forecasting 2023.
The Fortis ETF Strategies beat their respective benchmarks, but we understand investors are frustrated by seeing their account decline by double digits. One consolation is knowing we successfully managed to outperform when most mutual fund managers and many private money managers did not. Another positive is that we stayed within our disciplined approach, moving into defensive positions. Notably, our stock strategies significantly outperformed their benchmarks. Fortis Leaders 50 Stock Strategy and the Fortis Alpha 40 Stock Strategy beat their respective benchmarks by a little over 750 bps.
There is a lot of talk about whether or not we are heading for a recession in the year’s second half. Many investors see a recession materializing as a foregone conclusion. The most influential data will come from inflationary pressures, such as retail and consumer price data and GDP growth. Notably, Goldman Sachs Group Inc., JPMorgan Chase & Co., and UBS Asset Management anticipate the economy will defy the bearish fear as price growth eases — signaling big gains for investors if they are early to the game. But we first need to brace for more pain in the short term. The source of the pain would come from accelerated fears about rising inflation from small business owners and consumers adopting a “seek refuge” approach to their spending behavior. Regardless of a recession, stocks are most at risk in the first quarter because earnings estimates for companies may not fully reflect a slowdown.
Conflicting Inflation Data
We called the peak of inflation last March and have proven to be correct. However, it is important to remember that inflation data does not move linearly, and certain data points will likely emerge and spook the financial markets. Optimistic signs in the SWAP market point to CPI becoming substantially lower this year, making it hard for the Fed to ignore. The SWAP market is a complex animal, and at the most basic definition, it is an agreement between two parties to exchange sequences of cash flows for a set period of time. If they agree to pay lower interest rates than today’s interest rates, it is a strong signal that CPI, and thus interest rates, cannot remain high for much longer.
One of the most critical pieces of the puzzle to trigger the Fed to stop raising interest rates involves wage and labor growth. Wage and labor growth will slow, but there is a catch. Companies have been reluctant in many industries to reduce headcount due to the tough competition for talent in the marketplace over the past two years. Soon, companies will have to make these tough decisions to preserve profitability, and layoffs are expected. The Real Estate and Technology sectors will most likely shed jobs soon. The Fed and other central banks around the world may get it right this time, doing enough to slow growth without pushing us so far as to cause the kind of mass unemployment that we usually associate with recessions. However, a Fed Pause is more likely.
Rocky First Half, Better Second Half
Volatility will remain throughout the first part of the year and the S&P 500 Index may test October 22 lows. This would be a 10% decline from where we are now. Deutsche Bank is more dramatic in their estimation of a pullback, believing stock markets could plunge as much as 25% from levels today.
Notably, the average target of 22 strategists polled by Bloomberg has the S&P 500 Index ending 2023 at 4,078 points – about 6% higher than it ended 2022. These predictions range from negative 25% to positive 25% returns for the S&P 500 Index. Stocks are most at risk in the first quarter, and beyond, if earnings revisions for companies do not fully reflect a slowdown.
As the year unfolds and more evidence points to encouraging the Fed to pause, the better bonds and stocks will perform, especially if this happens quickly. Remembering bullish trends almost always begins well before an associated recession is key. From where we stand today, that would be anywhere from the second half of this year to the middle of next year. However, one thing we are sure of is that market trends happen more quickly than they used to. During a pause by the Federal Reserve, sometimes referred to as a “goldilocks” environment, stocks typically shine when the Fed can back off, and the economy is still chugging along. Worst-case scenario, we may have to wait until 2024 for these events to unfold. In the meantime, we will closely monitor the trajectory of a “pause” and build positions for a rebound, while also maintaining a disciplined and risk-conscience approach to investing.
Past performance is no guarantee of future results.