Last year was the stock market's most challenging year since the 2008 global financial crisis proving a tough run for both stocks and bonds. Some sectors like tech, cloud stocks, cryptocurrencies, and SPACs lost 80% or more of their value in 2022. Yet, despite last year's difficult backdrop, there's good news.
2023 is the 3rd year of the Presidential Cycle, which has produced an average gain of 17% with a 94% chance of a positive year. Bad years in the stock market have typically been followed by good ones. Since World War Two, after a down year that finishes with a down month (like 2022 did), there’s an 81% chance of a positive year that averages a 14% gain, which is well above the 9-10% average annual gain from the stock market.
Presenters:
Tom Samuelson, CFA, CMT, Vineyard Global Advisors Chief Investment Officer
Kendall Dilley, CFA, CMT Portfolio Manager, Vineyard Global Advisors
Sam Caylor, Investment Analyst & Senior Trader, Vineyard Global Advisors
Original Broadcast: Wednesday, January 25th, 2023
Stocks had their seventh worst year since 1926 and bonds their worst year since 1976. This made 2022 incredibly challenging for investors since bonds often go up when stocks go down, acting like a shock absorber. The Fed embarked on the fastest interest rate hikes in over 40 years, becoming the catalyst for resetting stock and bond prices.
Our strategies were defensively positioned all year, finishing with only low to mid-single-digit declines leaving less of a hole to dig out of before getting back to making money for our clients. Several of our strategies have fully recouped last year's modest declines in just the first month of 2023.
Bearish concerns include the controversial earnings outlook, a driver of stock prices. Last year, S&P 500 earnings dropped 4.1%, close to the 5% drop associated with a non-recessionary slowdown, which is what occurred in the US as GDP growth slowed from 5.9% in 2021 to 2.1% in 2022. While 2023 estimates may come down some, we are unlikely to come close to the typical recession's 20% earnings drop.
The US has $31.4 trillion in debt, hitting its limit around July 2023. Democrats want an unconditional increase, while Republicans want an increase with spending cuts. Neither party would benefit from defaulting or a shutdown. Though it has the potential to disrupt markets, we do not see the risk metrics associated with a worst-case scenario.
It's time for the Fed to wind down interest rate hikes or at least hit pause. Anything more than a 25 to 50 basis point increase in additional rates would run the risk of throwing the economy into a recession.
Over 80% of the declines last year were about resetting valuations, not about an earnings collapse due to deteriorating fundamentals. The S&P 500 decline has returned its valuation to its 20-year average of 18 times earnings. The Nasdaq's valuation is also below its long-term average of 24, sitting at 20 times currently.
After hitting a 40-year peak of 9.1% in June of 2022, there's a body of evidence suggesting we've seen inflation's peak. Year-over-year inflation has fallen to 6.5% since June, and expectations are a decline to 2.1% by the end of this year, remaining around the Fed's 2% mandate through the end of 2026.
Our U.S. labor market is at a 52-week low of three and a half percent. The Fed is trying very hard to raise this unemployment rate by 1% to four and a half percent, but this is well below the 7 to 8% we typically see during the average recession.
Finally, our indicators have improved significantly from the fourth quarter of last year. As a result, more and more technical indicators and risk metrics suggest we're close to the end of this bear market, if not on the cusp of a new bull market.
We're seeing steady improvement from our indicators and macro models and the historic analogs suggest a better year for investors in 2023, If we have a recession in 2023, it's likely to be mild and may already be discounted by last year's bear market. While a 5-15% pullback may be possible this year, it's more likely to be a buying opportunity than a continuation of last years' bear market.
And after participating strongly in 2021's bull market, we navigated last year's bear market well, which will continue to pay rewards for clients as the market recovers into 2023 and beyond.
