Although the risk of a recession may loom in the second half of the year, stock market may have an unexpectedly strong first half of the year. Look for openings in value stocks and Asia outside of Japan.
The renowned investor Barton Biggs famously said, “Beware of the human instinct to fight the last war. The majority of investors currently anticipate that the stock market will crash along with corporate earnings in early 2023 because they are waging the ultimate battle—the bear market of 2022. There is a lot of negativity, but I have more optimism.
First, historical research reveals a peculiarity in presidential cycles: The first quarter of the third year1—the quarter we are presently in—has been the greatest quarter for the S&P 500 out of all 16 during each of the 16 quarters of each presidential cycle since 1950. The S&P 500 has consistently increased over the 12 months after a midterm election year, such as 2022, by an average of 33%. Since the current presidential cycle has followed the same pattern so far, there is hope for this quarter.
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Returns on the S&P 500 have been noticeably lower in years with midterm elections.
Additionally, economic indicators like GDP and employment show that the American economy is far too resilient to justify a first-quarter earnings decline. Furthermore, given that the prices of these cyclical stocks typically decline before the economy falters, the recent outperformance of the financial, industrial, and material sectors also suggests the opposite. A solid first quarter is possible with the inflation rate continuing to improve.
Instead, earnings might gradually decline throughout 2023, frustrating bearish market sentiment. Long-term bond interest rates have declined more than short-term bond interest rates, inverting the yield curve, which typically heralds an approaching downturn in the economy. Could the year’s second half be weaker than the first after an unexpectedly strong first half? There is a chance. The second half of the year may be when the stock market is most at risk.
Overall, there are some promising signs as well as potential overvalued industries.
Possibilities in Value-Added stock market
Value stocks began to outperform the market in the fourth quarter of 2022, as sectors like energy, industrials, minerals, and financials took the lead. Though many investors don’t seem to recognise it because the memory of “easy” money in uber-growth stocks is just too alluring, we might be in the early stages of value outperforming.
Technology plunged 60% in the first year after the dotcom boom burst in 2000, and investors rushed to buy the dip. However, according to the Technology Select Sector Index, the technology sector fell by another 22% in the second year. Industrials, financials, and materials were all rising in the meantime, but investors missed it because they were still trying to buy what had performed well during the last bull market. There is a startling regularity in that behaviour this year. Investors have returned to the hot tech equities, but they are less interested in value stocks.
Mega-Cap Tech stock market Are They About to Fall ?
The market capitalization of the five largest tech stocks in the S&P 500 totaled just over 20% of the index at their peak during the dotcom stock bubble of 2000, bottoming out at 5% of the benchmark five years later. At their height, the five largest technology stocks in the S&P 500 made up 25% of the index in 2022. Will they also move to 5%?
On the one hand, the five top IT stocks’ average 30 times values today are probably never going to achieve the triple-digit valuations of 2000. However, the U.S. government has historically stifled mega-cap tech stocks’ growth in an effort to prevent them from monopolising their respective sectors, as evidenced by the increased regulatory scrutiny we are currently witnessing. Reducing exposure to mega-cap tech firms may be a good idea given slowing growth rates and premium values.
In 2023, what will the stock market do ?
Consensus forecasts call for approximately 5% earnings growth (opens in new tab) for S&P 500 companies in 2023, barring a recession, which is a very real possibility. That’s respectable but unquestionably less than it was in earlier years.
What is the stock market, and why would it be wise to educate yourself on it ?
A free-market economy includes the stock market as one of its elements. It enables businesses to raise funds by selling stock shares and corporate bonds, and it gives investors a chance to profit from the business’s financial success through capital gains and dividend payments.