Stock Market Forecast for 2023

•  Nama Cohen

•  Dec 27 2022
 

The S&P will have a two-year decrease starting in 2023, which is a rather uncommon occurrence. When has this happened before, and why is it improbable that the Fed would save the stock market?

The stock market's performance in 2022 was the worst in more than a decade, and there is no indication that the Federal Reserve will stop raising interest rates anytime soon. With the S&P 500 index on track to end 2022 with a drop of 19.8%, 2023 will start in a few days. According to Dow Jones market data, this is the large-cap index's first double-digit percentage loss rate since 2008, when it dropped 36.6% as a result of the global financial crisis.

If the current trend continues next year, that would mean the S&P has been down for two years in a row, a fairly rare occurrence, as history shows: from 1928 to 2021, it happened less than 10% of the time. Usually, in the year following a negative annual return for the S&P, the index rises by an average of 12.6%, and is positive in 17 out of 25 years.

The few cases in which the S&P 500 has declined for two consecutive years have been caused by a major economic event, such as the Great Depression between 1929 and 1939, a geopolitical shock, such as World War II, and the oil crisis of 1972, or both, in the case of the early 1970s. 2000, when the dot-com bubble burst, the attacks of September 11, 2001, and the subsequent American invasion of Iraq took place. The market's level of decline in 2022 with no sign of a trend change is a signal for investors to be cautious, analysts warn.

In 2008, after the subprime crisis, the S&P 500 recorded an annual loss of over 36%. The loss was recorded, among other things, after the holding company Lehman Brothers went bankrupt with a debt of 619 billion dollars, due to investments in subprime mortgages.

Regarding 2023, Jessica Raab, co-founder of DataTrek Research, says that the scenario in which the S&P 500 falls for a second year in a row is unlikely without another major economic or geopolitical crisis. However, help from the Federal Reserve is indeed critical for a rebound in US stocks after a difficult year, she writes.

But this time, analysts advise investors not to expect a helpful intervention from the Fed. Investors have been talking about the idea of ​​"Fed actual put options" since at least the stock market crash of October 1987, which prompted Alan Greenspan's central bank to cut interest rates. A put option is a financial derivative that gives the holder the right but not the obligation to sell the underlying asset at a specified level, known as the exercise price, and serves as an insurance policy against market decline.

According to Victoria Fernandez, chief market strategist at Crossmark Global Investments, the Fed will wait to decrease interest rates in 2023 until the market has a "shallow recession." "In the past, we believed and understood that we would have alternatives from the Fed, that the Fed would intervene right away and take care of it for us. But Powell is attempting to convey to the markets that, "Hey, we're not going to do that."

"This is why the stock market is so volatile right now, as no one knows when the Fed will ease. Powell is solely focused on the Fed's goal of bringing inflation down to 2%, and he has the room to do so given the strength of the US labor market," Raab wrote .

David Wagner, a portfolio manager at Aptus Capital Advisors in Cincinnati, noted that he expects the stock market to experience less pain and less price volatility next year, but that doesn't mean investors will see positive returns in the market.

Conclusions

The markets have historically been in a sprint lower and a marathon higher. This marathon may feature more hills than plains because of the prospect for slowing global growth and the less accommodating Fed environment, which might lead to further market volatility.

Disclaimer: The article does not constitute investment advice or marketing that takes into account the data and the special needs of each person.

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