As you well know, the stock market ended down for 2022. While that is not the outcome I was hoping for, I will let you know what is going on and what to expect in 2023.
WHAT IS HAPPENING
First, as I pointed out previously, the stock market consists of many individual company stocks. This means that the stock market will ebb and flow depending on the aggregate health of the companies that make up the market.
As you may have been hearing in the news, the Fed (chaired by Jerome Powell) has been increasing interest rates to tamp down on inflation. Inflation is curbed with increasing interest rates because it makes borrowing more expensive, which drives down investment and speculation. Since most companies in the United States regularly borrow money to fund projects, the increase in interest rates has hit their bottom lines and slowed investment in new projects. The negative effect of interest rates on companies and the projected 2023 recession have combined to dampen stocks.
The other major component is that stocks are still coming off their inflated, government-stimulus-induced highs from 2021. Based on the price-to-earnings ratio of the total stock market and the market cap-to-GDP ratio, I believe that there is still a little more decline yet to come.
WHAT TO EXPECT IN 2023
While nobody knows for sure, the Fed is expected to increase interest rates by another 1% in 2023. Since company profits are directly affected by interest rate hikes, the stock market will likely decline every time the Fed raises interest rates more than what the market has anticipated. The last time the Fed increased interest rates by 0.5% (12/14/2022), the stock market declined by 3%. Assuming that the Fed increases interest rates by 1%, future interest rate hikes are higher than anticipated, and this ratio will continue to be accurate, the stock market may see 6-7% downward pressure in 2023.
Many economists (myself included) believe there is a high probability of a recession in 2023. A recession is an economic reset. For companies, this means they will trim the fat and become more profitable. For individuals, this means higher unemployment and increased austerity. Additionally, companies and individuals traditionally redirect their net income to pay debts during recessions. The bottom line is that most companies (and many individuals) will emerge from 2023 with stronger balance sheets and more profit.
Given the information I have now and not accounting for unforeseen circumstances, I believe that the downward economic pressures of interest rate hikes and a recession will dampen the stock market but that the market will end in 2023 positively. If my projections are accurate, there are a few more months of volatility ahead, so hold on!
