by Rob Isbitts.
Argentina won the World Cup, and all I can think of is how to compare it to the current markets. It’s a blessing and a curse, but it is so. Lionel Messi and him teammates raised the trophy on Sunday and ignited celebrations around the globe. The scene in the photo I chose for this article is similar to the one I witnessed in my town, right after the final penalty crossed the line to solidify the championship.
Argentina’s win wasn’t a big surprise, at least when you consider them the second-placed team before the tournament started (France, the team they beat in third place, both less than the favorite team before the tournament is Brazil). But what was surprising was how they won, in a back-and-forth that went into extra time and was ultimately resolved in the worst, but also the only, way in modern football: penalty kicks.
Messi dominates the cup, chaos dominates the market
This year’s stock market is one that many observers (including this one) believe is at least likely to have a troubled year, if not a “favorite” year. A year on, two things happened to me that shocked and confused investors like when I looked at my phone on Sunday morning, saw Argentina leading 2-0 and thought to myself, “Oh, This is over.”
First, the stock market fell, but a significant part of it still stood. While the market was in a widespread sell-off at the end of the year (see this article for more on that situation and its historical precedent), the Dow Jones Industrial Average fell “only” about 10% , while the S&P 500 fell 20% and the Nasdaq fell 32%. Gold, which is considered bad because it doesn’t fight inflation the way some would expect, is down only about 3% for the year (all figures as of December 19, 22nd US market close). . So the stock market has been the market for stocks this year, as the old saying goes.
Likewise, 2022 will not end with a slow, easy visit from Santa. Instead, it’s ending the way it started, with off days piling up like snow in Buffalo. As was the case in 2018, several major investment firms have essentially closed down, and hedge funds don’t want to mess with their full-year returns later this year by putting capital at risk. Besides, there are plenty of reasons to blame losers to cover tax losses and have a “clean table” to start the new year. While I’ve never really understood or agreed with holding an annual “demonstration contest,” over the decades that concept has become too common to be ignored.
But I don’t have to like it. And that’s why I don’t think investors should focus too much energy on “this year” compared to “last year”. Because investing hard earned wealth is not a game. It doesn’t stop after 90 minutes plus penalty kick time. There was no extra time, and certainly no penalties. Honestly, there are few things with a higher probability in investing than taking a penalty.
Bonds rarely miss the net, but they did in ’22
According to TheAnalyst.com, the chances of taking a penalty in a World Cup are around 80%. Most of the other shots were blocked by the keeper, but not all. A very small percentage (less than 5% of kicks) miss the net completely. I used to play hockey at a very amateur level, and I can tell you with confidence and proof that nets in hockey happen a lot more often. Especially when I’m shooting. But I digress.
The markets of 2022 presented investors with a surprise as the rare moment you see a player on your team miss goal and the keeper takes a penalty. Specifically, bond investment prices fell. Then they drop some more. And, after briefly flirting with a rally, they drop again as we approach New Year’s Eve.
This is something that everyone has to get used to very quickly, even though many people (myself included) have warned for years that the time will come when interest rates will rise. And, since bonds are essentially priced based on the math of interest rates and time until bond maturity, the inevitable outcome of interest rates rising from near 0% to well above 4%. bond prices fell sharply. This is most acute at the “long end” of the bond curve, where bonds of all types have posted losses on par with the S&P 500 and Nasdaq this year.
The World Cup is over, but not the markets and investors’ money. So what do we focus on in 2023? Below, I present a grid that I update monthly in my subscription service. It simply seeks to identify and provide a brief commentary on the 10 factors that I believe will be most influential in the coming months. Given that it’s the end of the year now, I’d like to feed what’s essentially a yearly top into that analysis, which we affectionately call the Market Outlook Factor Overview (MOFO). So let’s see what this MOFO has to say about the current market situation.
Modern Income Investor (MOFO) Market Outlook Factor as of 12/19/22
In my opinion, they are listed in order of meaning. I’ve maintained this list for a few years, and while there have been some changes in what makes the Top Ten, the team has been surprisingly consistent throughout this year. What has changed as the years have passed is the ranking of each factor.
Fed policy is the leading factor through 2023. If this surprises you, I might recommend going back and looking at 2022. It’s been a Fed-obsessed market all year and while. I believe what’s more important to investors is not what the Fed can or can’t do, but how their money reacts to that information and news, I feel like I’m in the minority.
Did the Fed leave you disappointed, hopeful, or somewhere in between? How about ignoring all of it!
My recommendation for next year: don’t focus too much time on what the Fed can or can’t do. Prioritize making money and not losing big in the investment decisions you make. This is why I love technical analysis so much. The charts don’t care about what the Fed can or can’t do, or how Jerome Powell leans in response to a question, or whether he uses the same words as last time, at an advanced age. his own, he decided which new words to use. Charts care about one thing: price movement. It is also all that one’s investment statement reflects. And that’s what investors can spend or invest. The rest is just analysis to feed one’s decision making process.
If I haven’t lost you by now, here are a few comments on some other elements from the current MOFO:
* Inflation, like the Fed, is an excuse to talk about market advertising. Speculation is everywhere. But in 2023, what matters is not whether inflation will peak, but where it will stabilize for a while. I don’t think today’s investor base is ready to navigate a persistent single-digit inflation rate and I think that’s the most likely scenario over the next few years. This means beating inflation will again be an investor priority. And, while T-Bill rates look good for a while, at some point we’ll need to try to do better. That’s why interest on Short Term Bonds, which wasn’t even in MOFO at the start of 2022, has skyrocketed to 3rd place on the list. They are really competing on stocks and commodities…temporarily. Here too, enjoy the free lunch, but don’t fall in love with T-Bills in the long run as the dominant asset in your portfolio.
*For me, the things to watch for growth in early 2023 are numbers 6,7 and 8 in the MOFO list. Incredibly, market sentiment may have just turned weak. As I said before, the bear market doesn’t end when people call this the bottom or the “Fed axis”. They end up when no one is interested in the stock. We were hardly there.
Hidden leverage is how I rely on history at times like these. Because every bear market cycle seems to have an abrupt “oh no” moment (clean up the language there). This is where, as Warren Buffett says, at low tide you can see who is swimming naked. In this case, it was a big investor who went too far, used a lot of leverage, tried to be too cute, and caused turmoil in the financial markets. Maybe the FTX thing has something to do with that. But historically, it was something more systematic. The year 2022 is rife with liquidity and solvency concerns at some of Europe’s key banks. Whether it’s that or something completely out of the left field (as usual), 2022 is the year that creates such a problem, while 2023 will be the year it gets its attention and impact. market. We shall see. Remember, these are potential factors, not predictions.
And then there’s corporate earnings. Wall Street “buy-side” firms like to enter the new year with sky-high estimates, tending to ignore obvious factors like the likelihood of a rate hike last year to curb consumer behavior and therefore affect the company’s earnings in 2023. The risk of earnings disappointment is very high, and that could be a leading factor from Wall Street to Main Street, driving investors. worried.
Important decisions for investors
Like the old Casey Kasem American Top 40 Music Hits Countdown, MOFO brings together the factors that influence the market, ratings and tracks them. You don’t need a Top 10 list to make consistently productive investment decisions. But you need to take into account the key risk factors discussed above. 2023 will prioritize risk managers first, carefully considering the role (if any) where high-quality, short-term cash alternatives suddenly emerge and who are willing to learn and then make ways to profit from markets other than those that don’t have a constant upward move.
Some football matches are strategic, methodical, where talent takes the lead, gains an advantage and they win 1-0. Other games are more frenetic. And then you have situations like the 2022 World Cup final. Regardless of the situation, your best course of action is to be prepared to win in any environment.
The stock market enters 2023 as Sell Me. The same goes for long-term bonds. That may change in the tactical world in which I operate. But instead of wishing and hoping for the next bull market to emerge, be proactive about your process. You don’t want to sit here at this time next year, wondering why the market hasn’t recovered yet and what you’re going to do about it.