The stock market had a rough ride in 2022, with the S&P 500 (SNPINDEX: ^GSPC) index falling 19.4%. But as we start in 2023, it’s time to put on our thinking caps and ask ourselves: what can we expect for the coming year?
A history lesson
Well, history tells us that it’s not all doom and gloom. A bad year is almost always followed by a good one. In fact, the S&P 500 fell more than 20% in a single year on six occasions since 1928, according to Macrotrends.net data. In four of these six cases, the big drop was followed by gains of at least 23% the next year. The last time the S&P 500 didn’t follow this rule of thumb was in 1932, then the Roaring Twenties ended with four straight years of double-digit drops. Even then, the index then gained more than 40% in two of the next three years.
The S&P 500 didn’t quite make that list of six massive price drops last year. It fell just short with a negative return of 19.4%, or a slightly smaller loss of 18.1% if you adjust those returns for dividend payouts. Still, that was close enough that I feel comfortable relying on data from 20% drops in years past.
But we can’t rely on historical data alone. History may echo, but it is not guaranteed to repeat itself exactly. So we also have to consider the current economic environment. With both inflation and interest rates on the rise, the year ahead won’t be smooth sailing. However, there are some early signs that things might be looking up in 2023.
- Inflation is still high, but rates have been trending down since July.
- The Federal Funds Rate stands at a 13-year high of 4.1%, but experts agree that the rate increases should stop soon at roughly 5.5%.
- Unemployment, which spiked to all-time highs in the early COVID-19 pandemic, is down to lows not seen since 1969.
These data points don’t necessarily predict where the stock market is going in the short term, but positive trends are positive trends. If the economy doesn’t get back on its feet in 2023 after a short recession, the rebound will almost certainly follow in 2024.
Experts weigh in
Am I a lone voice in the wilderness here? Let’s see what financial experts are saying about a potential bull market in 2023:
- A recent JPMorgan Chase (NYSE: JPM) report says that the S&P 500 should “re-test the lows of 2022” in the first half of this year (roughly 3,600), followed by the end of Fed rate increases and general market recovery. The mega-bank expects the S&P 500 to close 2023 at 4,200, up from 4,000 today.
- Goldman Sachs (NYSE: GS), another massive financial services company, sees approximately 50% risk for a recession this year in a report titled “Caution: Heavy Fog.” However, the fog should lift in the second half and allow the stock market to bounce back. “By the end of 2023, as the recession recedes and the fog of uncertainty lifts, the equity market will most likely rally,” Goldman’s analysts say. “We would expect high-single-digit returns for a moderate-risk diversified portfolio.”
- Chris Hyzy, chief investment officer for Merrill Lynch and Bank of America (NYSE: BAC), sees “a foundational year for investors” in 2023. “The next business cycle could be characterized by new investing themes and new drivers of growth,” he said in the investment service’s official outlook for the new year. “This foundational year should be the base year of a renewed bull market cycle.”
And let’s not forget about highly regarded growth investor Cathie Wood. This week, the mind behind ARK Innovation ETF (NYSEMKT: ARKK) and other growth-oriented funds published her annual letter to investors. She didn’t pinpoint an exact turning point for the bear market but highlighted that investors should stay the course during a broad market downturn.
“I believe that the current market dislocation presents an opportunity for innovation strategies to thrive when equity markets recover,” Wood wrote. “Fear of the future is palpable, but crisis can create opportunities.”
She puts her money where her mouth is, too. In 2022, ARK Innovation roughly doubled its holdings in disruptive innovators like the crypto-trading market operator Coinbase (NASDAQ: COIN) and video-streaming technology leader Roku (NASDAQ: ROKU). I agree that Roku and Coinbase, among other winners on her list of 2022 buys, face outrageous growth opportunities in the long run while their stocks are trading at bargain-bin prices. Roku shares are down 72% from 52-week highs. Coinbase took an ever harsher 79% haircut over the same period. I’ve been doubling down on investments like these, and encourage you to seek out similar opportunities.
How to invest in uncertain times
So, what does all this mean for our investments? Well, the Oracle of Omaha, Warren Buffett, reminds us that the market doesn’t always reflect the state of the economy. So, instead of predicting the market, we should focus on building a diversified portfolio of great stocks and adding to it consistently. If you can do so while also taking advantage of ultra-low prices on long-term winners, that’s even better. The road ahead may be full of potholes, but it still leads to wealth-building returns in the years ahead.
It’s important to remember that investing is a long-term game. So let’s keep our eyes on the prize and make smart choices when the waters are rough. The best investors don’t let their market moves be controlled by emotions such as panic, fear, favorite stocks, or greed. Successful investing is all about long-term patience, solid research, and sober calculations — in 2023 or any other year.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Anders Bylund has positions in Coinbase Global and Roku. The Motley Fool has positions in and recommends Bank of America, Coinbase Global, Goldman Sachs Group, JPMorgan Chase, and Roku. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.