Where Stocks Are Going in 2023 and Where You Should Invest Now

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2022 was a lousy year for stocks — one of the worst in history.

Often, the year following a fall is a great time to buy. After all, the entire point is to buy low and sell high. Plus, it’s rare for the market to book back-to-back annual losses.

That being said, I’m not jumping in, at least not for the first few months of 2023.

The likelihood of a recession is growing as high interest rates and inflation continue to crimp corporate profits. Consumers aren’t feeling all that confident in the economy, and corporate CEOs aren’t, either, which means both consumers and corporations are likely to cut spending.

Economists aren’t happy, either. From a recent article on Reuters:

“A Reuters poll of economists published on [Dec. 8] showed that U.S. economic growth was expected to slow to 0.3% in 2023 following a 1.9% rise this year. It also suggests a 60% chance of a U.S. recession next year.”

Where’s the market going?

Like most investors, I didn’t have a great year in the market. I did, however, have a great year predicting where the stock market was going, as well as advising you what to do. For example, from my column of Nov. 11, “Beware the Recent Rally“:

“When it closed on Nov. 11, the S&P 500 was at 3,993. While the rally could continue for a while, I’m guessing the S&P won’t get much beyond 4,100 to 4,200.”

Sure enough, the market continued higher after I wrote that, but the rally stalled out at about 4,100. As of Dec. 30, it’s at about 3,820.

But that’s now. What about 2023?

I’ve never seen so many Wall Street strategists make virtually identical predictions — namely, that we’re in for a shallow recession during the first half of 2023 that will cause stocks to fall, followed by a recovery in the second half of the year as the Federal Reserve stops raising rates and perhaps begins lowering them.

Check out this list of investment strategists. They’re pretty much all predicting the scenario I just described: The market falls 10% to 25% in the first half, then recovers and rebounds, with 2023 ending either slightly up or about even.

Here’s something you should know about consensus, though: It’s rarely correct.

At the start of 2022, analysts on average saw the S&P 500 climbing to 4,950 by the end of the year. They missed by more than 1,000 points.

I’m not going to guess where the market is going in 2023 until I see how things shake out. I suspect interest rates are going to stay higher for longer than most pundits are predicting, which could mean the recovery is further out than many expect.

Where you should, and shouldn’t invest

While I’m not going to express any degree of certainty when it comes to the overall market, I will predict the types of investments that could outperform, or underperform, in the current environment.

My suggestions:

Don’t invest in companies that don’t make money. The more profit a company makes in relation to its stock price — in other words, the lower its price/earnings ratio — the better.

Companies that have yet to make a profit aren’t good bets when rates rise and economies sink. That’s why companies that did super well when the post-pandemic rally was roaring are faring so poorly in today’s rising-rate environment.

Example: Carvana, the company with the used car vending machines, has never made money. It got as high as $360 in 2021. It recently traded at $4.50.

Don’t invest in technology. Technology stocks have been pummeled this year, with the tech-heavy Nasdaq composite down more than 30%. I love investing in technology (my largest holdings are Google parent Alphabet, Microsoft and Apple). I also love buying when prices are low. But for at least the first part of 2023, I’d expect these stocks to underperfom the market.

The reason is Big Tech stocks are still trading too high in relation to their earnings. Earnings estimates for many tech stocks are likely to be reduced, leading to lower stock prices in the coming weeks.

To be clear, I’m not selling my tech stocks, but I’m not adding to them, either. Great companies, just not a great time to buy them. When the market bottoms, which I expect will be around 3,000 to 3,300, I’ll wade back in.

You can see my entire portfolio here.

Don’t invest in consumer discretionary. Consumer discretionary companies, as the name implies, are companies that offer goods and services that we don’t really need. They don’t do well in bad economies, because that’s when we exercise discretion when parting with our hard-earned money.

This group would include retailers like Macy’s and Home Depot, as well as companies like Disney and Harley-Davidson.

The Vanguard Consumer Discretionary ETF is down about 35% so far this year. I would expect that relatively poor performance to continue, although when the economy turns, this will be a great place to be.

Do invest in consumer staples. As this name implies, these are companies that make money in all types of markets, because we need what they’re selling. They include drug companies like Eli Lilly, as well as companies like Walmart, Kroger and Procter & Gamble.

The Vanguard Consumer Staples ETF isn’t down at all this year. It’s actually up about 1.3%.

Do invest in industrials. While technology stocks are overvalued and will likely remain out of favor for much of 2023, industrial stocks are the opposite: cheap and gaining attention. Industrial stocks are those of companies that make things and move things, like Boeing, Honeywell, Raytheon Technologies, UPS and Caterpillar.

The Vanguard Industrials ETF is down about 8% this year, but there’s about to be a boom in infrastructure spending. That’s going to help this group.

Oil stocks can also be included in this group. I own a bunch, which made a bad year less bad. The Vanguard Energy ETF is up about 62% this year.

Do invest in small caps. Small companies often outperform big ones, especially coming out of a recession. Small-cap (short for “small-capitalization”) companies are now more undervalued relative to big companies than they’ve been for 30 years.

I own the Vanguard Small-Cap Value ETF. It’s down about 9% this year.

Do invest in bonds. Which is better: Earning an ironclad, guaranteed 4% to 5% in Treasury bills, notes and bonds, or losing principal in a bad stock market?

If you’re an income investor, the last 10 years have been a nightmare, with savings rates at practically zero. The sun is now shining; it’s time to make hay. As I said months ago in “Don’t Even Think About Buying Bank CDs. Here’s Why“:

“This year has brought about massive changes in financial markets. The Fed’s assault on inflation has crippled the stock market, but it’s created savings rates we haven’t seen for many years. When times change, we’ve got to change with them. I’ve been investing for 40 years, but made my first Treasury purchase about a month ago. Take a few minutes to explore what’s out there.”

If the economy sinks, rates will likely sink as well. Do yourself a favor and lock in some decent rates now. Invest in some short-term bonds, but also some longer-term bonds or bond funds.

Bonus: While rates are high is also a good time to invest in an annuity. For further explanation, see “Considering an Annuity? Now’s the Time to Act.”

And now for my standard disclosure: First, I used Vanguard funds in this column merely to illustrate how different sectors perform. They’re not necessarily the best ETFs, and I’m not recommending them specifically. Do some checking around; there may be better ones.

Most important: These columns are written to tell you what I’m thinking and doing, not to tell you what you should do. In short, they’re not investment advice. As I said, I’ve been doing this for 40-plus years, but I’m not always right. Do your own research, make your own decisions, and take responsibility for your own money.

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Check them out: You’ll be glad you did!

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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