Happy 2023. We are pleased to start another year with you all, especially after the ugly investment climate during 2022.

I am confident that we delivered some meaningful lessons including: putting on hedges; using disparate strategies for better outcomes; using inverse ETFs for protection; how to watch volatility indices to know when it is more favorable to invest; selling big winners to protect capital; utilizing cash as an asset class; finding new advisors; and blending stock, bond, and commodity investment strategies together (we offer this to our MGAM clients) to name a few of the topics we touched on during 2022.

So, what does 2023 have in store for investors?

There are numerous (and differing) opinions out there. I have seen very conflicting point of views. Are you aware that virtually no economists or brokerage analysts accurately predicted hitting the 3800 level on the S&P for year-end 2022? Most of them had it pegged at well above 4200. The average prediction was for 4400 for the year-end (which would have still been a 10% decline on average).

The most recent opinions seem to be centered around 4200 to 4400 for year-end 2023. However, based on much of the analyst rhetoric I read daily, we could take some difficult paths to get there. Some suggest we will see the 3200 level (or lower) first, and then a sharp rally to above 4500 before we come back to 4200 before the end of the year.

If we do get somewhere between 4200 to 4400, that would produce an approximately 10%-15% return (with dividends) in 2023. We, however, are not predicting this.

If this occurred almost 12 months from now, it would be considered a positive year. It would also put us back into a year of asset growth. Below is a chart that depicts the possibility that we have a favorable year ahead, as the mapping indicates that pre-election years historically have a high chance of favorable markets, according to Oppenheimer & Co analysts.

A Quick Recap of 2022

It was a very tough investment year. Not just for investment markets, but for geopolitical risks, the high cost of living, and businesses starting to show signs of weakness (and now considering layoffs).

I have recently spoken with associates from the investment world I have known throughout the years who manage both stock and bond funds as well as hedge funds. Nobody had expected 2022 to be such a rough investing year. Few anticipated the carnage of 2022.

My experience also suggests that many veteran and successful investment managers hold themselves out to be “active” investment managers. However, during 2022, most of them were anything but.

Consider some of the “best” managers like Cathie Woods (ARK Funds) who hit home runs for years in their funds. Many of those same funds were down as much as 70% during 2022, and made a complete roundtrip back to performance that they had in 2020 (effectively giving up two years or more of returns). ARKK, for example, has been trading at the same level it was trading in the fall of 2017.

Many of these big fund managers (and advisors I know) thought that some of their favorite (and most widely held stocks) wouldn’t go down so much. Sitting with huge capital gains, these advisors and managers did not want to sell.

We addressed this many times, suggesting that it was far better to sell and pay the tax then to watch the capital dissipate. Many of these stocks went down so much that they destroyed trillions in wealth.

It is this significant loss of capital that has traumatized investors and motivated them to do nothing. They began to move to the sidelines, wanting to mitigate any further loss of capital. Then late last year, they began to put capital in cash, short-term treasuries, or even buy CDs at the Bank, which are now paying as much as 4%.

The Balanced Approach

More Americans, through retirement plans or their own directed 401k plans, have money allocated in 60% equities (stocks) and 40% bonds or fixed income funds. This is the widely-held Balanced Fund approach.

Most advisors who manage client money with a plain vanilla allocation and without investment alternatives (hedge funds, private equity, real estate, etc.) manage the preponderance of client assets this same way. For balanced investors, 2022 was a disaster.

Historically, most investors have used fixed income to offset the negative returns from stocks, given that “flight to quality” and an accommodating Fed cause bonds to rally when stocks do poorly. For this strategy to work, it requires an accommodating Fed that allows interest rates to fall to keep the economy humming in a bad stock market year. This was not so during the past year.

Given the Fed’s persistence to fight inflation, they are not accommodative. They are doing anything possible to tighten rates by raising the Fed Funds rates (overnight lending to banks), or draining liquidity out of the system (selling their bond and mortgage securities in the market). This hawkish action is to get inflation down.

As a result, the bond portion of balanced accounts was no help whatsoever to stock investors, especially those holding balanced funds, in 2022. The 60/40 portfolio was down more than 15%. Performance this negative has only occurred five other times in the last 94 years.

Interestingly, the last time this balanced portfolio suffered mightily was back in 1972 and 1973. What was occurring back then? High runaway inflation.

Inflation Continues and is Persistent

Now that everyone realizes inflation is the insidious problem plaguing our economy (and the markets), you will hear continuous chatter from the media about how inflation is coming down quickly. The bigger question is, when will it get to the Fed’s target of 2%?

We believe it is much more persistent than being represented. We know this because our resident Guru Mish Schneider has researched the trends extensively (besides being a successful commodity trader back in the 70’s and seeing this picture before).

We also know this because there has already been so much inflation that even if they get it to cool, higher costs are already baked into the cake. Raw material, wages, transportation costs, production costs, etc. are all very high and are not coming down soon, if ever.

One of the most damaging areas with high inflation is the insidious price of food. These costs continue to cause irreparable harm to the American consumer and the retail sector of our economy (which is over 70% of the economic engine).

A Good Start to 2023

We just finished the first trading week of 2023. We have already seen volatility and wild gyrations.

Possible market movers include the Fed Minutes (negative with no signs of dropping interest rates in 2023) to positive wage growth slowing data on Friday morning (along with slowing employment growth). This fueled a massive stock market rally on Friday and for the week, all S&P Sectors ended positively, with the overall market up over 2% for the day.

The Importance of Early January.

According to Yale Hirsch and the Stock Trader’s Almanac, there are three potential indications for a good investment year. These are the Santa Claus Rally (SCR), the First Five Days (FFD), and the January Barometer (JB).

Wednesday, we finished the famous SCR. Friday finished the FFD. Both were positive. The JB can only be calculated after the month of January. However, to give you a better idea and the positive effect the SCR and JB have had so far, please review the charts below.

Typically, when the SCR is positive and the FFD is positive, the JB is usually positive. Therefore, there is a high likelihood this portends better things for the stock market (S&P 500) this year.

Still a Negative Bias in the Market

While the market has had a nice bounce, there still remains a negative overtone. However, some analysts would say that this provides a contrarian point of view and may be a positive factor. So it was no surprise that we got a bounce on Friday.

We know of the continued negativity because the put-call ratios are at historical highs (more people are buying portfolio insurance through puts than optimistically buying calls). We are also continuing to see a severe bearish sentiment reading from the AAII (American Association of Individual Investors).

For these reasons and others, many investors have stopped speculating and are waiting to see more internal signs of positive footing for the stock market. Also, they are reading and hearing all sorts of warnings from people calling for a much more severe downward move in the market.

We are not sure if that will happen, but our investment strategies are Tactical, Adaptive, and Dynamic (TAD). The investment ship we guide employs adaptive strategies and will adjust the sails for different wind strengths and velocity. 

The Stock Market Rarely Produces an Average Return

While historically the stock market produces an 8-10% return, it rarely if ever actually has that kind of return. The stock market’s long-term returns is comprised of many extreme years of way high movements or even the rare big sell off.

In the last 50 years, the fact remains that:

• There have only been three 20% losses, and those were in 1974, 2002, and 2008. But, of course, last year just barely missed this dubious feat.
• Five years lost at least 15%, and 12 years lost at least 10%.

2023 Predictions from Wall Street Gurus

Big View Summary - Risk On

• All US Indices rose on Friday, with the SPY up 2.2%, the Nasdaq gaining 2.6%, and DIA moving back to a bullish phase with a 2.1% gain.
• All indexes are trying to recover and reclaim important support levels. While DIA remains the only one in a bullish phase, both the SPY and IWM are sitting less than 1% lower from their respective 50-day moving averages.
• Sector rotation changed from defensive to risk-on sectors, such as utilities (XLU), which decreased by 0.3% for the week, to semiconductors (SMH), which increased 3.9%, indicating overall risk-on sentiment.
• In market internals, the McClennan Oscillator improved for all US indexes, confirming a strong upward market breadth thrust in numerous stocks.
• The 52-week high to 52-week low ratio grew substantially in the NYSE and Nasdaq, with new highs leading the way.
• In volume analysis, trading levels have improved across the four major US Indexes, and volume patterns have flipped from negative to positive.
• Value stocks (VTV) moved back to a bull phase and broke out, displaying continued outperformance over growth stocks (VUG).
• Emerging markets and developed foreign markets continue to outperform US equities, with EFA displaying strength, holding above its 200-day moving average in an accumulation phase and a golden cross in real motion.
• The ruro and the yen both continued their gains against the US dollar.

Neutral

• Except for the diamonds (DIA), all major US indices were below their 50-day moving average price on Friday.
• The risk gauges improved to a neutral reading..
• The market was driven higher by almost every sector rallying. However, gold miners (GDX) led with weekly gains of 9.5%, and metals & mining rose 5.6%.
• Gold miners and foreign equities were the top hot spots for the week. China (FXI) rose 6.4%, with Mexico and Peru closely following.
• The spread between short-term volatility (one-month) and long volatility (three-months) stabilized even with the market up on Friday.
• Copper miners (COPX) are holding up well, and this could be an early indication of industrial metals and manufacturing heading higher.

Risk Off

• The QQQ is gaining ground and headed toward its 50-day moving average, but it is still 3% below the 50-day moving average resistance level.
• Precious and industrial metals all outperformed the US market this week and continued to gain leadership over US equities on a short- and longer-term basis.
• Gold continued to reach new highs, while oil is consolidating.
• Growth stocks are in a bearish phase and are out of favor.

More By This Author:

Fair Warning! Looking Forward Into 2023
October Was Not So Scary After All - Things To Keep A Watch Out For
Job Growth And Rising Oil Prices Fuel The Ongoing Inflation Story