Stock Market Predictions for 2023

Many of the risks in 2022 will carry forward. But, our stock market predictions for 2023 are optimistic this has been priced in with a comeback in Bonds.

2022 proved to be a difficult year for the markets on the back of high inflation. The war in Ukraine added fuel to the excesses seen throughout the pandemic in the form of government spending, near-zero interest rates and corporate expansion.

If anything, 2022 was truly the "return to normal" where companies were forced to stop growing at all costs and instead, show a path towards profitability. The technology sector was especially hard hit as the discount rate applied on future cash flows (i.e. how investors value growth companies) increased substantially due to central banks tightening at an aggressive pace (see chart below).

So with that, where do we see the markets going in 2023? The key stock market predictions for 2023 as Investipal sees it are focused around: Inflation, Recession, Bonds and geopolitical tension.

1. Inflation

Western central banks continue to maintain an inflation target of 2%, meaning that if inflation cannot be tempered, we should expect further rate hikes into 2023. For context, this has been the most aggressive tightening by the Fed in recent memory.

Rate hike

Source: Bloomberg

While the war still rages on in Ukraine, effecting oil, gas and wheat markets, the latest inflation readings do show signs of cooling.

A peace treaty in Ukraine could see western nations quickly unlock sanctions against Russia, cutting prices in oil and gas. Longer term, there is no doubting nations will reduce reliance on Russian oil moving forward but, we would likely see a sharp reversal in oil and gas companies domestically which have risen +55% in 2022 (when looking at the XLE ETF).

Shipping costs were another major driver of inflation. As countries (read China) shutdown due to COVID restrictions, the price of a shipping container rose from $1,300 to a high of $11,000 over the last two years. These prices continue to trend downwards, now at $2,100, reducing the cost of imports substantially.

2. Recession

You probably haven't been able to avoid the recessionary headlines over the past several months as high inflation and lending costs have reduced purchasing power for everyone.

While used car prices and housing starts have started to decline, often a leading recessionary indicator, the job market has been particularly resilient.

If we do formally enter a recession in 2023, not all is lost in the eyes of the stock market. Remember, the stock market is forward looking and takes into consideration investor sentiment amongst a range of leading macroeconomic indicators. 

The good is that stocks, mainly in the technology sector, are showing signs of a bottoming. It appears that investors are anticipating that a recession is likely and has been priced in, albeit a further leg down could always develop. While investors may want to buy up the biggest losers (e.g. tech companies) in the hopes they recover the fastest, we will need to see the Fed cut interest rates to really fuel that trade.

Historically, out of a recession cyclical stocks like commodities and industrials lead as economies restart and the need for base materials increases to fuel consumption.

3. Back To Bonds

Bonds have been yielding record lows much of the past decade, forcing investors to hunt for yield elsewhere. For the first time in over 10 years, rates are back in an appealing territory for both yield hungry and safe investors. Check out our previous work on Bonds here.

The 60/40 portfolio (this represents holding 60% stocks and 40% bonds), has been hard hit in recent years due to a weak bond market. However, with US 10Y Treasuries yielding 3.7%, investors should consider adding to their fixed income allocations over the next year.

4. Geopolitical Tensions

If the war in Ukraine has taught democratic nations anything this year, it's that governments need to continue (or start) to prioritize defense spending. Japan recently announced its intention to gain first-strike capabilities while the US and EU have to replenish dwindling stockpiles of weapons that have been donated to Ukraine.

While we don't want to sound overly pessimistic, high inflation coupled with geopolitical tensions has very familiar undertones to that of the 1930s. Government spending on defence is now forecasted to increase over 50% over the next 5 years, a boon to the US defence complex like Raytheon, Lockheed Martin and Boeing. 


Source: McKinsey


Many of the risks that developed in 2022 will carry forward for the better part of 2023: high inflation and geopolitical risk. Markets do appear to be bottoming and for the first time in 30 years, bonds appear attractive for everyday investors. 

We remain cautious into the new year where it's likely to be a stock-pickers market. What we mean by that is, investors should remain vigilant around macro-drivers like economic data and a possible resolution in Ukraine. This could whipsaw markets and see an unwinding in areas like oil and gas.

Happy holidays from the entire Investipal team!

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