Today marks the last session of 2022. And not surprisingly the bears wanted to stake their claim on the session…and on the year by mauling stocks once more.
Right now, the base case for the start of 2023 is continuation of that downward trend. However, that is far from set in stone.
Thus, I thought it would be good to use today’s commentary to review things that could alter the path of the markets for better or worse…and our associated trading plan.
Once again, the best place to understand the base case for next year is in my recent presentation: 2023 Stock Market Outlook.
In a nut shell I expect a fairly run of the mill recession forming in the first half of 2023 with stock prices falling to a range of 3,000 to 3,200. Note the average bear market has a 34% decline which would equate to 3,180 for the S&P 500 (SPY).
The reason we might fall further than average is that the previous bull market had overall stock valuations (PE) as high as the 1999 tech bubble. So, some of that excess may need to be drained out before the next bull market can begin.
Gladly, I also see a new bull market emerging with stocks rising from these lows into year end. That is why my 2023 outlook presentation also concentrates on how to time your way back in at the bottom to enjoy the glorious gains that will unfold as the bull stampedes out of the gate.
My prediction is kind of middle of the pack with some market prognosticators seeing it milder and some much nastier. And that is what makes investing so complex. It’s hard coming agreement on what the future holds. That clarity is only available in hindsight.
Now let’s review what would make this a milder bear market. Or what we could call the Best Case Scenario.
The answer is fairly simply. That being where the Fed amazingly engineers a soft landing with no recession unfolding. This would likely mean that we have already seen bear market bottom in October at 3,491 and stocks would get back on a long term bullish march to new highs in the years ahead.
There will not be some magical moment that every investor gets the message at the same time. As they say “no one rings a bell at the bottom”.
Instead, more and more investors will assess the odds that this is a soft landing leading them to shift their investments more bullish. Whereas other investors will come to that realization later likely with a heavy dose of FOMO.
The better we understand these clues now…the earlier we would join the bull rally to enjoy more upside. Let’s review:
- The sooner inflation cools down, with special focus on wage inflation, which has been the stickiest area that is concerning the Fed. This means a lot of attention will be paid to the 3 key monthly inflation reports: CPI, PPI and PCE.
- Employment remains robust and never see unemployment rate get above 4%. This job security makes people feel more confident in spending versus savings keeping the economy humming along.
- Key economic reports bouncing back from recent weakness. Most vital being ISM Manufacturing and Services getting back above 50 for good. But also many eyes will be on Retails Sales for health of the consumer.
- Clear pivot in Fed statements to consider ending rate hikes…and maybe get back to lowering rates in the future. Bulls have jumped the gun on this front many times in 2022 only to get a painful wake up call from Chairman Powell. So, this is not about guessing whether the Fed is shifting. Instead, it is hearing an unmistakable change from their current hawkish posture.
As these things happen, you will first want to start taking profits on bearish bets. From there you start shifting to bullish investments.
In short, the “Risk On” growth oriented trades that did the worst in 2022 will become the serious outperformers in the early innings of the new bull market. Technology for sure. Also consider positions that are economically sensitive; Industrials, Materials, Transportation, Consumer Discretionary etc.
Now let’s check out the flipside…
Worst Case Scenario for 2023 Stock Market
The short and sweet version is to say it would be the opposite of what we would find in the best case scenario.
Inflation too hot…Fed too hawkish…Job market too weak…Recession too deep…Stock prices decline 40%+
This outcome fits under the heading that starting a recession is like opening up “Pandora’s Box”. Once those demons are unleashed it is unclear how much damage they can create. This is especially true if employment craters spurring a very negative chain reaction:
Job Loss > Lower Income > Lower Spending > Lower Corporate Profits > Lower Stock Prices
And unfortunately, the #1 solution for companies suffering weakened profits is to subsequently lower expenses…like more layoffs. And this is when the vicious cycle goes into a rinse and repeat cycle cutting the economy and stock prices lower and lower.
The investment game plan here is to hold on to bearish bets longer with S&P 500 (SPY) bottom likely in a lower range of 2,800 to 3,000. Note that 2,800 marks a 42% decline from the all time highs. Hard to imagine heading much lower than that.
And then just as things are getting their ugliest…that is likely when the new bull market emerges. This fits in nicely with the famed Warren Buffett quote “to be greedy when others are fearful”.
That is when you flick the switch to the more Risk On growth oriented investments. Gladly their prices will be so depressed that even a value investor could get on board the Tesla’s (TSLA) and Roku’s (ROKU) of the world with a straight face.
Any of these outcomes is possible. However, I still think best to first plan for the middle case scenario as outlined in my 2023 Stock Market Outlook.
Next, we stay vigilant watching for the aforementioned signs that would point to things being better or worse than expected. Then make appropriate changes to your investment strategy.
I appreciate that this all sounds easier said than done. But this not my first time to the bear market rodeo. In fact, I have weathered 4 previous bear markets in good stead. Each time learning valuable lessons that help with each next edition.
So please keep dialed into my commentaries going forward to stay on the right side of the action and we will make it safely to the bullish shores that lay ahead.
What To Do Next?
Watch my brand new presentation: “2023 Stock Market Outlook” covering:
- Why 2023 is a “Jekyll & Hyde” year for stocks
- 5 Warnings Signs the Bear Returns in Early 2023
- 8 Trades to Profit on the Way Down
- Plan to Bottom Fish @ Market Bottom
- 2 Trades with 100%+ Upside Potential as New Bull Emerges
- And Much More!
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
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SPY shares were trading at $382.06 per share on Friday afternoon, down $1.38 (-0.36%). Year-to-date, SPY has declined -18.25%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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