Investments: 2022 Recap & 2023 Outlook
After a turbulent 2022 for the financial markets, where do we go in 2023?
Photo: Yahoo Finance (Click to enlarge).
Note: You do NOT need to enter your email address to read this. However, I am using this as a free platform and won’t SPAM you, so please add your email to be alerted to new articles and to VOTE in the polls. Thank you!
After a rocky 2022 for both stocks and bonds, where do we go in 2023? The chart above shows the S&P 500, as measured by the SPY ETF, over the past 12 months. We can see the sharp moves and volatility for stocks during this time. Many swings are marked by moves of 10% to 15% - up or down - over just four-to-eight-week periods!
You can also see the lower lows and lower highs — which implies that we remain in a downtrend for now. Where do we go from here? Where should we place investment dollars? As usual, this depends on each individual’s risk tolerance and portfolio positioning. Here are some notes:
Stock Market Valuations
Stock market valuations are approaching fair market valuations — especially when the S&P 500 is in the 3600-3950 range.
Earnings estimates — as well as multiples (Price/Earnings) — continue to decline due to higher interest rates and other factors.
Indeed, JP Morgan recently reduced S&P 500 earnings by about -10%.
Note that markets often overshoot to the upside and downside due to emotions.
Still, we are now closer to fair value— notwithstanding the recent snapback rally all the way back to about 4100 (after the drop to 3500) on the S&P 500.
Technical Market Action
After reaching a high of about 4800 on the S&P 500 in December 2021, stocks have had a rollercoaster ride in 2022.
Various stock market indices dropped as much as -30% or worse during the year, and have currently rallied more than 10% from October lows.
We are still in a pattern of lower lows and lower highs — so the technicals remain in the bearish camp.
One top Wall Street analyst is calling for a test of the recent lows near 3500.
Our work shows that the end of bear markets are often marked by capitulation selling (which can see stocks decline by -5% to -7% or worse — in a single day!). Other times, we see a large decline, followed by a long sustained base, before the longer-term uptrend in stocks resumes.
On the other hand, volatility is relatively high and the recent rally has been strong (suggesting increasing strength to the bullish argument).
Long-Term Balanced Portfolios
Long-term investors who believe in a prudently-diversified portfolio should “stay the course” and remain invested in their balanced portfolio.
If they have additional monies to invest, they can invest in the same proportion — targeting their asset allocation mix — and rebalance, as needed.
Many investors can invest in various asset classes, sectors and countries via ETFs. Just be careful with fees and ensure good volume in the ETFs you choose.
Sectors that Look Undervalued
Some investors would like to focus on certain investment sectors that look undervalued and/or have good intermediate or long-term potential.
Here is a list of sectors that are projected to have good long-term expected returns:
Emerging Market Stocks
Emerging Market Bonds
International Stocks
We also run certain models that highlight particular countries, sectors, asset classes, factors, and more. But that’s beyond the scope of this article.
Similar to what we said earlier, you can access these assets via ETFs. Just watch out for fees and ensure decent volume (to ensure good bid-ask spreads).
I-Bonds & TIPS
Conservative investors may find the US Government I-Bonds interesting. You can find these bonds on the US Government website TreasuryDirect.gov.
The TreasuryDirect website isn’t very user-friendly, but I-Bonds currently offer nice yields: currently just under 7%, annualized. Rates reset twice a year: in April and November, as a function of inflation.
There are limits to how much can be invested, but the yields and US Government backing can make this an interesting place to park funds.
You do tie money up for at least a year (you cannot redeem during the first year). And if you withdraw the funds before five years, you lose the last three months’ worth of interest.
TIPS (Treasury Inflation Protected Securities): After a difficult year for ALL bonds (as interest rates rise, the market value of bonds declines) — TIPS are finally offering better expected returns. The combination of higher yields (and potentially more stable interest rates soon) — combined with still-high inflation means TIPS currently offer solid expected returns moving forward.
Absolute Return & Other Diversifying Assets
Liquid absolute return strategies were one of the few winners during 2022.
For most investors, the higher fees and steep learning curve make these strategies difficult.
There are, however, some ETFs that are starting to roll out absolute return, managed futures, ARP (Alternative Risk Premia), and other diversifying and defensive alternative investments.
Also, please try to understand the investments where you place your hard-earned savings.
On Crypto
The risks are currently high due to defaults, rumors, and other unclear information.
At some point, things should stabilize, and then crypto can again offer the high reward/high risk profile.
If you believe in digital currency, wait for either capitulation selling or a long base to be established - before establishing a material position.
Summary
We covered a lot of information that should work for conservative investors — as well as more aggressive investors.
Long-term investors can find comfort in the fact that some of the “air has been let out of the bubble.” Stocks are closer to fair market valuations.
Those worried about the economy, inflation, and black-swan events may want to hold monies in a conservative investment until we see capitulation selling or an established base — before adding to risk assets.
Here’s to a happy and healthy 2023! Happy holidays from my family to yours!
Carlton Chin, a graduate of MIT, is an investment officer focused on portfolio strategy and data-driven models. Carlton enjoys applying numbers and probabilities to the financial markets and sporting events. He has been quoted by the New York Times, ESPN, and the Wall Street Journal.