The door is now closed to 2022 and the S&P 500 (SPY) faltered once again to place an exclamation mark on the bearish year. That’s the past. Now let’s talk about the future, including the best and worst-case scenario for stocks in 2023. 40-year investment veteran Steve Reitmeister addresses this hot topic in his new commentary, including a trading plan to stay one step ahead of the market. (Maybe even buy TSLA & ROKU on the dip). Read on below for the full story.
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Today is the last session of 2022. And not surprisingly, the bears wanted to stake their claim on the session… and on the year by tearing up stocks again.
At the moment, the baseline scenario for the start of 2023 is a continuation of that downward trend. However, that is far from set in stone.
That’s why I thought it would be good to use today’s commentary to review things that could change the path of the markets for the better or for the worse…and our associated trading plan.
Again, the best place to understand the baseline scenario for next year is in my recent presentation: Stock market outlook for 2023.
In a nutshell, I expect a fairly common recession to set in in the first half of 2023, with stock prices falling to a range of 3,000 to 3,200. Note that the average bear market is down 34%, which equates to 3,180 for the S&P 500 (SPY).
The reason we might fall further than average is that the previous bull market had total equity valuations (PE) that were as high as the tech bubble of 1999. So some of that excess may need to be drained before the next bull market can take hold. to start.
Fortunately, I also see a new bull market emerging with stocks rising from these lows towards the end of the year. Therefore, my presentation of the 2023 outlook also focuses on how you can time your way back down to enjoy the glorious gains that will unfold as the bull charges out of the gate.
My forecast is kind of in the middle of the pack, with some market forecasters finding it milder and some much nastier. And that is what makes investing so complex. It is difficult to agree on what the future holds. That clarity only comes afterwards.
Now let’s see what would make this a milder bear market. Or what we could call the Best Case Scenario.
The answer is quite simple. That’s where the Fed amazingly pulls off a soft landing without a recession unfolding. This would likely mean that we have already seen the bottom of the bear market in October at 3,491 and that stocks would once again be on a prolonged bullish march to new highs in the years to come.
There won’t be a magical moment when every investor gets the message at the same time. As they say “no one rings a bell downstairs”.
Instead, more and more investors will estimate the likelihood of this being a soft landing, leading them to shift their investments more bullishly. While other investors come to that realization later, probably with a good dose of FOMO.
The better we understand these clues now… the sooner we would join the meeting of the bulls to reap greater benefits. Let’s see:
- The faster inflation cools, with a special focus on wage inflation, the most troublesome area the Fed is concerned about. This means that a lot of attention will be paid to the 3 main monthly inflation reports: CPI, PPI and PCE.
- Employment remains robust and the unemployment rate never exceeds 4%. This job security makes people feel more confident about spending versus saving, which keeps the economy going.
- Major economic reports are recovering from recent weakness. Most importantly, ISM Manufacturing and Services are back above 50 for good. But many eyes will also be on Retails Sales for consumer health.
- Clear lynchpin in Fed statements to end rate hikes…and perhaps cut rates again in the future. Bulls have jumped on this front many times in 2022, only to get a painful wake-up call from Chairman Powell. So it’s not about guessing whether the Fed is shifting. Instead, it hears an undeniable change from their current hawkish attitude.
When these things happen, you want to start taking profits on bearish bets first. From there you start to shift towards bullish investments.
In short, the “Risk onGrowth-oriented trades that underperformed in 2022 will become the serious outperformers in the early innings of the new bull market. Technology for sure. Also consider functions that are economically sensitive; Industry, materials, transportation, consumer durables, etc.
Now let’s look at the downside…
Worst Case Scenario for the 2023 Stock Market
The short and sweet version is to say it would be the opposite of what we would find in the best case scenario.
Inflation too hot…Fed too aggressive…Jobs market too weak…Recession too deep…Stock prices fall 40%+
This result fits under the heading that starting a recession is the same as opening.Pandora’s box”. Once those demons are unleashed, it’s unclear how much damage they can do. This is especially true if employment craters cause a very negative chain reaction:
Job loss > Lower income > Lower expenses > Lower corporate profits > Lower stock prices
And sadly, the number 1 solution for companies dealing with diminished profits is to then reduce costs…such as more layoffs. And this is when the vicious circle goes into a rinse and repeat cycle, driving the economy and stock prices ever lower.
The investment plan here is to hold bearish bets longer with S&P 500 (SPY) bottom likely in a lower range of 2,800 to 3,000. Note that 2,800 marks a 42% drop from all-time highs. Hard to imagine going much lower.
And then, just when things are getting their ugliest… that’s probably when the new bull market will emerge. This ties in nicely with Warren Buffett’s famous quote “to be greedy when others are afraid”.
That’s when you switch to the more risk-oriented investments. Fortunately, their prices will be so low that even a value investor could get on board the Teslas (TSLA) and Rokus (ROKU) of the world with a straight face.
Conclusion
Each of these outcomes is possible. However, I still think it’s best to plan for the middle scenario first, as described in my Stock market outlook for 2023.
We then continue to watch closely for the aforementioned signs that things are better or worse than expected. Then make appropriate changes to your investment strategy.
I appreciate that all of this sounds easier said than done. But this isn’t the first time I’ve gone to the bear market rodeo. In fact, I have weathered 4 previous bear markets well. Learning valuable lessons every time that help with every next edition.
So please continue to dial in my comments in the future to stay on the right side of the action and we will safely reach the bullish shores ahead.
What to do now?
Check out my brand new presentation: “Stock market outlook for 2023” covering:
- Why 2023 a “Jekyll & Hyde” year for shares
- 5 warnings indicate the bear will return in early 2023
- 8 trades to make a profit on the way down
- Plan to Bottom Fish @ Market Bottom
- 2 Trades with 100%+ upside potential as new bull emerges
- And much more!
Watch now: “Stock market outlook 2023” >
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares traded Friday afternoon at $382.06 per share, down $1.38 (-0.36%). Year-to-date, SPY is down -18.25% versus a percentage increase in the benchmark S&P 500 index over the same period.
About the author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investing experience in the Reitmeister Total Return Portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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