Well, 2022 sucked.
The S&P 500 ended down 20% and even conservative bonds, which are supposed to provide ballast, had a terrible, awful, no-good year with double-digit losses (due to rapidly rising interest rates). And, on top of all that, the "Santa Rally” failed to materialize and there are lots of people posting ominous claims about 2023.
Now, those bearish claims for 2023 may turn out to be true, but who knows? I mean, as recently as 2018 we had a crappy year, including an awful December. In fact, in 2018 the market was up until the last quarter but swooned down more than 18%. That, however, was followed by an extraordinary year in 2019 with a quick recovery and the S&P 500 up more than 28% for the year.
The fact is, most crappy years are followed by good ones. Except when they’re not, and that’s quite rare.
So rare, in fact, that its only happened 2 times since the inception of the S&P 500 index (while S&P indexing has been around since the turn of the last century, the “500” index is only 66 years old, formed in 1957). The last time it happened was from 2000 through 2002 and the only other time was from 1973 to 1974. Both were similar in ultimate depth—around a 46% drawdown.
I’ve previously focused on 1973 to 1974 as being somewhat reminiscent of the current bear market, but even then the market rocketed back in 1975 and 1976, gaining 31% and 19%, respectively (though, admittedly, it took until 1980 before the market decisively took out its old high). Still, my point is there are only 2 times since the inception of the S&P 500 that the index posted back-to-back losses; most bad years were followed by good ones.
I recognize the foregoing is pretty superficial, but I have more substantive thoughts too.
First, I don’t believe there’s ever been a time when a recession was so broadly telegraphed in advance. Literally everyone around the globe—down to the shoeshine boy (a Depression Era reference)—thinks a recession is coming. And, even if they’re 100% right, that’s unusual.
So, could it be that broadly telegraphed recessionary worries brings some of the recessionary effects forward? I mean, if you know you might lose your job next year because of a possible recession, do you keep spending like normal or are you more cautious? What does that do to inflation? How will the Fed react? To be sure, many reports confirm that more than 90% of CEOs expect a recession and “are preparing for one.”
And what about the pain trade? If most people expect a recession and a further drawdown, isn’t the pain trade the opposite?
Or the fact that the market is forward-looking and earnings estimates for 2023 have already come down (although they could obviously come down even more). As it stands now, recent top-down forecasts are already predicting S&P 500 earnings per share (EPS) of around $200 for 2023 versus EPS of $220 for 2022, a 9% drop in EPS.
Likewise, with the U.S. already being at full employment, it seems obvious that layoffs will be coming as companies try to cut costs (i.e., labor is typically the biggest cost of doing business). We already saw mass layoffs beginning 4Q 2022 in high-growth companies, and more than 60% of businesses generally say they expect layoffs in 2023.
Lastly, just as everyone can agree this was a lousy year, I think most would agree there’s a powderkeg of buying that will take place the moment the market senses the Fed’s tightening is over, and perhaps another powderkeg when it senses the Fed is about to pivot the other way. Will this happen in 2023? Doubtful as it might be, it could. I mean, look at falling used car prices or rents. What if those “transitory” predictions for inflation in 2021 turned out to be less “sticky”?
Remember, the stock market is not the economy. Markets look ahead while economic data looks behind.
Now, maybe this is just wishful thinking on my part. Maybe the S&P 500 of 2023 will be more like 1974 when it dropped 30% (after a 17% drop the year before)? I honestly don’t pretend to know for sure, but if I had to guess/predict I’d say we get a moderate recession, but a volatile year, with a single-digit increase in the S&P 500 for 2023, i.e., about 4,100 for the end of 2023. I also think we are already in a recession. Only time, and the NBER, will tell.
Either way, closing the books for 2022, my public market investments ended down 11.4% versus 20% for the S&P 500. I call that a win. |