2023 Market Prediction!

When I was a stock market reporter for PBS Nightly Business Report, I loved reading the predictions that would come in from the various Wall Street strategists and market gurus...

Yes, 90% of them turn out to be bunk - the opposite happens. That's just the nature of the markets and stocks in general anyway.

But I still like reading them - and making an occasional prediction myself (OK, really we're talking about educated guesses here) for an important reason. Half the battle of being a better investor or trader is throwing off the yoke of conventional thinking and prepping one's mind to consider alternate scenarios.

So if we're prepared to think of other possibilities - however remote - it's a lot easier to mentally shift gears and not be left behind (or left holding the bag) as the market moves sharply higher (or lower).

2023 Prediction

So here's my prediction in a nutshell for 2023:

Overall, I think 2023 will be remembered as the year the bear market ended, with a strongly bullish Q4. But for January through late August or early September, we'll need to deal with more painful selling (no doubt with occasional sharp rallies) in the major indexes.

Hopefully, I'll be completely wrong. That's what I'm praying for.

If I am wrong (more on how to tell, at the end of this article), I think we'll see it very quickly as trading begins for 2023 tomorrow and in the next few weeks as investors shake off the recession threat - and key economically sensitive sectors ETFs like consumer discretionary stocks and semiconductors start rocketing up off their disappointing year-end lows.

And there will always be potential opportunities in certain individual stocks that could climb higher, even as the market moves lower.

But we need to respect the very real possibility of a still-deeper broad market decline.

So that begs the question...why would the market head even lower from 2022's already-depressed levels?

Reason #1: TINA takes a powder.

Perhaps you've heard of Wall Street's famous rallying cry of the past 15 years, since the 2008 financial crisis..."TINA" - There Is No Alternative (to stocks).

Well, thanks to the Fed's aggressive interest rate hikes last year, there IS a competitive alternative (of sorts) compared to the stock market.

For example, I have a savings account at Discover Bank; I don't know why I've even kept it since it's paid almost zero for most of the past decade. But now it pays 3.3% annually - and that's not even the highest rate one can get for a plain vanilla FDIC-insured U.S. savings account.

I'll never grow rich on 3.3% interest. I need to own stocks to do that, and to counter the impact of inflation eroding my purchasing power over time.

But then again, I'm not taking any risks with a savings account (or by owning Treasuries or other "near-cash" holdings). The FDIC has my back.

And collecting a 3.3% stream of income with no risk doesn't sound bad compared to owning the S&P 500, which at the current market price collectively pays dividends with an annual yield of 1.65%.

Reason #2: "De-rating" the S&P 500

Various bits of jargon tend to go in and out of fashion on Wall Street. One you'll likely hear a lot in coming months is what strategists call "de-rating" (or sometimes, "re-rating").

All it means is that a stock or index gets re-evaluated from one valuation level to another level - either higher or lower - based on the profits and annual profit growth it happens to generate.

With the prospect of (maybe) a Fed-induced recession, slower profit growth and a slowing economy, it's likely that a lot of Wall Street strategists are going to "de-rate" the S&P 500 to a lower valuation level.

Basically, they're going to say that the S&P 500's price level is too high, and essentially over-valued, based on the prospects for earnings growth over the next 12 to 18 months.

I remember the last "de-rating" period during the 2008 financial crisis. A lot of investors would get trapped by lethargic stock market activity, in the belief that maybe the indexes had dropped far enough and were about to move higher.

Instead, a Wall Street brokerage would wait until afterhours to issue a press release announcing its "de-rating" of the S&P 500.

And then those same folks would find themselves unable to get out of their newly purchased trades at a decent price, as the market opened sharply lower and kept heading south in fear of yet more "de-rating" announcements by other brokerages.

Reason #3: Oil stocks are due for a correction

Even though oil prices fell sharply in the second half of last year, oil stocks rose steadily - giving the DJIA and S&P 500 a helping hand as we closed the books on 2022. I think that situation is set to reverse in the new year.

Maybe the easiest way to demonstrate that is by showing the slide in oil prices (the top half of the chart below)...and yet oil stocks like Exxon (XOM) - instead of falling as well - continued to show strength through the end of 2022:

With few other bullish options last year, fund managers didn't rotate out of energy stocks even as oil prices fell more than 30% in the second half of the year.

That's an important reason why the DJIA only fell -9% in 2022 (with its major oil component stock Chevron rising +51%), and helping disguise weakness in the S&P 500, which lost -19%. Meanwhile, the tech-heavy Nasdaq with far fewer big energy stocks, dropped -33% to finish almost at its lows of the year:

Reason #4: More "get me out" selling of prior "FANG" favorites

I hate to say this, but I don't think a lot of investors are finished selling their former favorite tech stocks.

It's the nature of stock market psychology that once the spell is broken on once highly-favored stocks, lots of investors tend to keep selling (i.e. "get me out" of the stock).

So even though it's now possible to make a case for many tech stocks being fairly valued now, it wouldn't be uncommon for those same stocks to keep heading lower, taking them down to undervalued status.

I think that's where many stocks, like Apple (AAPL) and Tesla (TSLA) are likely headed in the first half of 2023.

Something else that bothers me about a lot of these previous "fan favorites"...

Reason #5: Gaps All Over

From a technical chart-reading perspective, many of these stocks still have large "gaps" in their charts, far below their current prices - gaps created in the explosive days of the mid-2020 pandemic rebound as many stocks exploded higher.

There's an old saying that I always try to keep in mind, and that I've repeated here before: "Gaps are made to be filled."

For example, AAPL has one such gap, about 25% below its current price:

TSLA has 3 gaps that were created in 2020 as investors bid the stock to parabolic proportions - now deflating for a variety of reasons:

There's a bit of psychology associated with chart gaps. When a stock explodes higher - creating a gap - it means investors and traders are willing to pay any price to own the stock. And like all "impulse buys"...sooner or later they regret the purchase. So gaps often become a place on the chart where investors finally throw

Even less glamorous stocks like Amazon (AMZN) and Target (TGT), bid up to highly-overvalued levels during the pandemic as e-commerce plays, still have large unfilled gaps on their charts, stretching back to 2018 and 2019:

What if I'm Wrong?

Here's how to tell if I'm wrong about all this...we need to see the stock market indexes to make new near-term highs. It's as simple as that.

For example, in the chart of the Nasdaq 100 (QQQ) ETF below...we need to see the index move above the dab of red in the lower-right corner - which represents the last (failed) attempt to re-gain lost ground.

If we started seeing the indexes start "acting" better, making new near-term highs...I'd begin to change my tune.

But through all of 2022, each attempt to do so has met with failure.

So for 2023, here's to hoping the stock market surprises us all and begins to make its way higher. If it does, I'll change my tune in a hurry. But I'm not getting my hopes up about it.

Jeff

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