Image Source: Pixabay

Whether you made money in 2023 or lost, looking back and studying the past can help with the future. In 2023, stocks climbed the proverbial wall of worry and shocked the masses. The Nasdaq 100 ETF (QQQ) gained more than 50%, while the Russell 2000 Index (IWM) moved from 52-week lows to 52-week highs in record time. Below are five valuable takeaways for investors:

Liquidity is King

The Federal Reserve is pivotal in influencing liquidity through its monetary policy decisions. By adjusting interest rates and implementing various tools, the Fed can control the money supply and the cost of borrowing, affecting overall market liquidity. For instance, lowering interest rates typically encourages borrowing and spending, thereby increasing liquidity in the financial system. Additionally, the Fed can engage in open market operations, buying or selling government securities to inject or withdraw money from the banking system, further impacting liquidity conditions. Market participants closely monitor the central bank’s actions as they can have profound effects on the availability of funds and the overall health of financial markets.

In 2022, stocks ran into trouble as investors anticipated rate hikes amidst rampant inflation. However, as the Fed took its foot off the gas pedal and paused rate hikes, stocks rallied strongly. As the old Wall Street adage warns, “Don’t fight the Fed!”

Image Source: Federal Reserve Bank of NY

Markets Discount Future Earnings

Equity markets discount future earnings by incorporating investors' expectations into current stock prices. Investors analyze a company's fundamentals, growth prospects, and overall economic conditions to estimate its future earnings potential. This forward-looking assessment is then reflected in the current stock price. Therefore, when you observe the S&P 500’s current price, it essentially reflects the collective market consensus on the index’s expected future earnings and growth. The evidence can be observed in the chart below. During the past 3 bear markets, the S&P 500 Index bottomed months before earnings did.

Image Source: Zacks Investment Research

Stocks Bottom on Bad News

On October 13^th, 2022, headlines read, “Inflation Spikes to 40-year Highs!” To the shock of Wall Street, stocks bottomed that very day and never looked back. Stocks tend to bottom on lousy news and top on good news.

Image Source: TradingView

Historical Seasonality is Worth Monitoring

Seasonality in the stock market refers to recurring and predictable patterns or trends that tend to repeat at certain times during the calendar year, influencing stock prices based on factors like economic conditions, investor behavior, and historical market performance. If you only followed seasonality trends in 2023 you would have not only made money but also outperformed most investors handily.

Image Source: TrendSpider/Equity Clock

The Market Discounts the Future of the Economy, Not the Other Way Around

In a 2018 interview, legendary investor Stanley Druckenmiller said, “The inside of the stock market is the best economist I know.” While many economists predicted doom in 2023, critical areas of the market, like Semiconductors (SMH), Steel (SLX), and Housing (ITB), exhibited strength and provided clues that the economy was not as bad as the “experts” made it out to be.

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