Another Volatile Year Awaits Investors in 2023

There’s much to say about financial markets in 2022. Such as:

• Good riddance.
• It could have been worse, like in 2008.
• A lot of very smart people got the market totally wrong.

Which leaves the question: What next?

If you’re hoping for a quick rebound, history doesn’t offer much hope, except perhaps the 2020 recovery after the first shock of the COVID-19 Pandemic.

Losses as big as stocks suffered in 2022, which started in January and continued with a few relief rallies, usually require months of recuperation.

The Dot.Com bust that began in the Spring of 2000 didn’t bottom until October 2002, partly because of the trauma from the Sept. 11, 2001, terrorist attacks.

The 2008 financial crisis really began when stocks peaked in October 2007 when the S&P 500 index hit a closing high of 1,565.15. The index — and stocks overall — fell 56.8% over 16 months until the March 2009 bottom. It took another four years for the S&P 500 to get back to 1,565.

The damage in 2022 was this:

• The S&P 500 tumbled 19.44% for the year, with only 141 stocks showing gains.
• The Dow Jones Industrial Average fell 8.78%. Just ten stocks ended the year higher.
• The NASDAQ Composite fell 33.1%.
• The Nasdaq 100, which tracks the biggest Nasdaq stocks, fell 33%, with only 24 stocks showing gains.

One can blame or cheer the Federal Reserve for much of the slump. Add the Ukraine-Russia war as a big contributor, too.

The war exacerbated global inflation, as OPEC countries and Russia combined to push oil prices to as high as $130 a barrel in the first half of 2022. U.S. gasoline prices topped $5 a U.S. gallon in June before falling back to about $3.20 on Dec. 31.

Global food prices jumped as well because Ukraine and Russia are two of the world’s biggest grain exporters.

In November 2021, the Fed declared it would be raising rates certainly throughout 2022, maybe longer. The goal would be to bring U.S. price inflation back from as high as 9% to its 2%-a-year target. The first rate increase came in March, and the Fed moved the key federal funds rates seven times during the year from 0% to 0.25% to 4.25% to 4.5% at its December 2022 meeting.

The central bank is expected to boost the Fed funds rate to 4.75% to 5% on Feb. 1. Some Fed officials see the rate hitting 5.1% this year, perhaps higher, before cutting back in 2024.

It isn’t just the rate moves that unnerved investors, market bulls, and economists like the Wharton School’s Jeremy Siegel, who has warned in multiple television appearances that the Fed campaign is too aggressive.

The Fed’s stubbornness is an issue. When the Fed’s rate campaign started, Wall Street analysts and everyone hoping to come up with the next Apple (NASDAQ:AAPL) or NVIDIA (NASDAQ:NVDA) had assumed the Fed would raise rates slowly and not for long. And stocks would weather the pressure. In fact, as late as March 2022, strategists at many investment houses were projecting the S&P 500 would top 5,000 in 2022 and maybe hit 5,300.

In fact, the Fed’s moves were not slow. They were fast and big. And every time someone on Wall Street predicted the rate hikes were about to end or moderate, Fed officials, especially Chairman Jerome Powell, would repeat in speeches and press conferences that rate hikes were needed and would continue -- at least into next year.

2022 Was All About Energy

Investors seem to want decent growth, real profits (as opposed to simply revenue growth), and dividends.

Energy fits the bill. Of 11 S&P 500 sectors in 2002, energy was the sole winner, up 59.1%. Nine of the top 10 S&P 500 winners in 2022 were oil-and-gas related, led by Occidental Petroleum (NYSE:OXY), up 117%, and Hess Corporation (NYSE:HES), up 92%. Exxon Mobil (NYSE:XOM) jumped 80.3%, and Chevron (NYSE:CVX) was the top Dow performer, up a paltry 53%.

Reported profits were great. Cash flows were better. And they paid dividends and/or bought in shares.

The Ukraine-Russia War and hopes for a reopening of China’s economy have boosted prospects.

Utilities, health care, and consumer staples stocks suffered small losses because investors wanted stocks with consistent revenues, profits, and dividends.

An interesting winner: Campbell Soup (NYSE:CPB), founded in 1869. The shares were up 5.6% in December, 10th best among S&P 500 stocks for the month. The annual gain was a modest 4.1%. But that was great compared with what happened in Tech Land or in tech-related stocks.

And Warren Buffett, often derided as old? (He is, in fact, 92.) His Berkshire Hathaway (NYSE:BRKb) was off slightly in December, true. But Berkshire was up 15.7% in the fourth quarter and finished 2022 with a 3.3% gain.

Health care is booming as populations get older in the developed world. Merck & Company (NYSE:MRK) and Amgen (NASDAQ:AMGN) were the second and fourth-best performers in the Dow industrials, up 44.8% and 16.7%, respectively.

The big carnage has been in technology and related industries, young biotech companies, and software companies just getting started. Initial public offerings fell.

Tesla (NASDAQ:TSLA) fell 36% in December and 65% for the year, its worst year as a public company, as investors worried the electric vehicle market isn’t growing as quickly as hoped. Plus, there was concern that CEO Elon Musk was getting too wrapped up in the problems at his $44-billion toy called Twitter.

Tesla was the fifth worst S&P 500 performer on the year and eighth worst among stocks in the Nasdaq-100 Index. Two of Tesla’s rivals in the electric vehicle market, Rivian Automotive (NASDAQ:RIVN) and Lucid Group (NASDAQ:LCID), were the worst Nasdaq 100 stocks for the year, off 82.2% and 82.1%, respectively.

Tesla said Monday that its fourth-quarter deliveries were up 18% from a year earlier but slightly below Wall Street estimates. Tesla’s deliveries were at 405,000 vehicles; the consensus had been for 420,000 deliveries. For all of 2022, Tesla sold 1.3 million vehicles, up 40% from 2021 but short of the company’s 50% growth target.

Amazon.com (NASDAQ:AMZN) fell 49.6% after warning it faced economic headwinds around the globe and started layoffs. Its market capitalization hit $1.88 trillion in July 2021. The market cap on Dec. 31: $856.9 billion.

Facebook parent Meta Platforms (NASDAQ:META) dropped 64%.

Semiconductors were battered. Nvidia, which powers video games and the huge computer banks that run cryptocurrencies, dropped 50.3% for the year and 13.6% just in December.

Intel (NASDAQ:INTC) dropped 12.1% in December, bringing its 2022 decline to 48.7%, the worst among the 30 Dow stocks.

The biggest tech names weren’t spared either.

Apple fell 26.8%. Microsoft (NASDAQ:MSFT) dropped 28.7%. Google parent Alphabet (NASDAQ:GOOGL) dropped 38.7%.

And everyone knows that the cryptocurrency market is struggling with the failures of several players in the business, including FTX, allegations of fraud, and worse. Bitcoin finished 2022 at $16,549, down 3.23% for December, down 64% for the year, and off 75% from its November 2021 peak.

Rate Increases are Already at Work

The effects of the Fed’s rate moves have been spreading beyond financial markets and crypto across the U.S. economy and in other countries where central banks are also worried about inflation. What the Fed wants to see is weaker wage growth reducing overall pressure on domestic prices.

Economists believe that government data will start to show prices coming down early this year. The question is when.

What will probably not happen is rates coming close to 0% again. That is widely blamed for stocks becoming overbought before and after the Pandemic.

Stable employment is keeping wage growth strong, with U.S. unemployment reported at 3.7% in November. A new report from the Bureau of Labor Statistics is due Friday. The consensus estimate is 3.7% again.

Residential real estate prices and activity have slowed, especially in expensive markets. Rate increases have boosted mortgage rates from around 3% in July 2021 to 6.42% last week. Result: The principal and interest payment on a 30-year, $275,000 mortgage are up 50% to $1,724 a month.

The fear is that leaving rates relatively high will guarantee a U.S. recession. In fact, many analysts and money managers expect a modest recession this year.

A warning: Be careful what you ask for. A modest recession can easily metastasize into something worse.

How Could 2023 Play out?

As bad as the stock market was in 2022, it never seemed to experience a huge washout so that a bottom could form.

The relative strength indexes for the most important averages (Dow, S&P 500, Nasdaq, Nasdaq-100, and Russell 2000 indexes) have not broken decisively below 30 -- a level that technicians watch as a signal a market or security is oversold.

Tesla’s RSI has been below 30 since Dec. 16 and reached nearly as low as 16 on Dec. 27, a very strong overbought signal. While the shares did jump 13% over the last three days of trading, Tesla’s RSI is still under 30.

The Fed is still the great wild card. Most Wall Street strategists see the central bank reaching a top or terminal rate of a bit over 5% in the first quarter and then watching to see if its efforts are working.

So, don’t expect a big rate drop this year.

The fact is, it can take a year to 18 months for the full picture to emerge. The Fed kept its fed funds rate between about 4% and 6% for six years between 1994 and 2000.

We don’t know how the Ukraine-Russia war will end. It has turned into a brutal affair, with neither Ukraine nor Russia willing to budge. The risk is that it expands into something worse than a bloody, ugly spat between two neighbors.

The China-Taiwan standoff continues. China wants to control the island nation with its highly educated, technically savvy workforce and expand its control in East Asia.

The U.S. mid-term election results may produce chaos in the House, threatening the ability of Congress to get legislation passed. Rep. Kevin McCarthy, R-California, is struggling to win enough votes to succeed Nancy Pelosi as Speaker of the House. His Republican allies are vowing major investigations of the Biden administration and threatening to disrupt government functioning.

It may take three to six months for the economy and markets to stabilize. So, anyone thinking about making new investments would do very well to plan for specific entry points. If you’re a seller, pick your target and move when it hits.

Disclosure: The author does not own any of the securities mentioned in this article.