2023 Was Another Unexpected Year for the Stock Market

As we approach the final days of the year, now is a good time to reflect on the events that defined 2023. At the year’s outset, speculation about inflation and the appropriateness of the Federal Reserve’s response dominated headlines. With the stock market experiencing an 18% decline in 2022 and corporate earnings plummeting after the economic shutdown of 2020, uncertainty was high. To jumpstart the economy, the Federal Reserve injected a lot of money into the economy, causing a 25% increase in money supply and a 40% surge in national debt by the end of 2023—a potent mix that contributed to high inflation. With everything that had happened over recent years, it was easy to assume that 2023 would be another challenging year. However, investors soon sensed the light at the end of the inflation tunnel. This year became a lesson in the unpredictability of markets, challenging our ability to forecast with consistency.

 

 

This could have been a year that went either way. The market’s 25% gain might seem obvious now, especially with cooling inflation numbers and the perception that they will continue to decline. However, predicting this outcome on January 1, 2023, was far from straightforward. Another quarter of higher inflation could have left the market continuing its decline from 2022. Examining the economic landscape of 2023 prompts us to question why investors react the way they do.

 

 

On January 1, 2023, the 10-year treasury bond yielded 3.57%, after reaching almost 5% earlier in the year before settling at their current 3.8%. Interest rates, often considered the enemy of stock prices, had an unexpected effect on the market. Higher interest rates typically correlate with lower stock prices, yet the market’s positive trajectory seemed to be the result of lower future rate expectations with the Dow reaching new all-time highs. The path of interest rates easily could have led investors to conclude that 2023 would be uneventful. Did corporate earnings play a role in this unexpected outcome?

 

 

In January 2023, the S&P 500’s earnings estimate for the year was $226, a modest increase from the peak of $210 in the first quarter of 2022. Despite these optimistic projections, concerns about higher interest rates and inflation led to a dip in the Dow from 34,600 to 33,200. As we conclude 2023, earnings are likely to settle at an underwhelming $213, not the recipe for a substantial stock price surge. Despite low expectations, the market is on the verge of finishing the year up more than 25%, with the Dow at 38,000.

 

 

The market’s behavior, focusing on future expectations rather than current realities, makes predicting its course a formidable task. It might feel like navigating a vast casino. However, certain market drivers are anything but random. In 2019, before the world experienced economic calamity, GDP was $21.9 trillion. GDP for the 2^nd qtr. of 2023 stands at $27.6 trillion. The Dow is approaching 38,000, anticipating economic growth. Earnings estimates for 2024 stand at $242, ultimately tracking GDP growth and suggesting optimism about the future. While it’s unclear if the market has factored in all the good news, or if inflation has been quelled, what remains certain is the economy’s continuous growth and earnings trending ever higher. The exact timeline, however, is always uncertain. Sometimes stock prices do become stretched, but predicting near-term outcomes is virtually impossible. In essence, 2023 reaffirms that predicting investor behavior is challenging. Despite uncertain indicators at the year’s start, we’ve witnessed a robust year. While a handful of stocks played a pivotal role, there are still opportunities with reasonable valuations.

Wishing you a Happy New Year!

 

Observations On The Market No.390