Well, that sucked…. S&P 500 ended the year down 18+ % this year, never a good feeling, however nonetheless just part of what markets do. Tying to price all commonly known things at a particular point in the future is never an exact science or for that matter predictable. These are the times I will tell you that investing is a marathon, not a sprint, and the one thing that you will never get in stock market returns is consistency.
Let’s look a little deeper into the returns of last year and gather some data that may help us decipher this year and beyond.
Looking beneath the returns you found that Value outperformed growth by quite a margin, a complete reversal from what had happen in previous periods. S&P 500 Value index was down for the year less than 6% while S&P 500 Growth index was down just under 30%. It’s been quite a while since I’ve seen a divergence that big.
International stocks squeezed out slightly better returns than the US, mainly due to a rally in the last quarter, primarily based on a weakening US dollar.
Small/Mid cap stocks also slightly beat large caps for the year, as you know a theme that I have been calling for for some time without to much success. Bonds were down double digits for the year (as measured by the Barclays Aggregate Index). This is what particularly hurts the retail investor as bonds have been engrained within us to be the “safe” asset class. They are used to provide diversification and divergence from stock returns, however this year was just one of those years were they added to the dismay.
So, with that news, let’s close the door on last year and look to the future.
I’m looking for the S&P 500 to be fairly valued at the end of 2023 at around 4300, with $215 of earnings. (About 14% from here). Not back to all-time highs but that’s not to say that we won’t get back there before year end. As you know, I give the market what I think is a “fair value”. The stock market always comes back to earnings, this is what ultimately matters, but rarely hits. You will find that the market overshoots and undershoots this target. Sounds like a pain, however these times give us the opportunity to overweight or underweight your exposure to the index.
Shorter term, the fight for PPI inflation I believe is behind us (meaning the cost of goods is likely done going up) and the fight now is with wage inflation. Fridays job number will give us our most recent review of whether we are getting positive signs of a rollover or we need to lets this play out a little longer. (I’m writing this on Thursday).
This all culminates in what I believe will be a year that ends the current bear market, we stop worrying about inflation and we can get back to focusing on the macro, to value the capital markets. I believe that when inflation finally comes down it will come down quickly and you’ll see the 10 year treasury get back down below 3% by the end of the year. If I’m right you’ll likely see Growth stocks outperform value, and the yield curve to be more normalized, meaning you’ll get rewarded more by going longer in duration as opposed to what we have now.
For the first (maybe second) quarter the status quo will likely be the same as the past quarter or two. Range bound for the most part and we may even touch or break the most recent lows. If this does happen this, in my view, may provide the best opportunity for new dollars we have seen in a while.
Here are a couple of interesting stats to consider.
- The average time it takes to return to all-time highs when you’ve had a market that pulls back 15% plus is 24 months. If that’s the case, 24 months would put us at January 3rd of next year. (FactSet)
- If we are able to start a new bull run sometime this year, the average increase from the bottom is 152% over the course of 5 years (according to FactSet)
In summary, we are digging through the deluge of fiscal stimulus and the economy is starting to normalize. Focus will soon be on the extent of earnings decline, and how deep the recession will be. Likely to see some good opportunities in the first/second quarter. When we do get the start of the next bull run, my expectations are it will be a nice ride.
Wishing you a Happy, Safe & Prosperous 2023.
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