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Weekly Overview: Preparing for the Next Market Move in 2023


“The coming years will bring occasional major market declines, even panics, that will affect virtually every stock. No one can tell you when these traumas will occur.”

This quote comes from billionaire investor Warren Buffett, who in an annual letter to shareholders spoke about market volatility, suggesting that not only is volatility normal, but should be hailed for presenting great growth opportunities. ‘purchase. Equally important, the CEO of Berkshire Hathaway (BRK-A) (BRK-B) wanted to point out the madness of those who believe they have a magic crystal ball and can predict what is going to happen at any given time.

In 2022, looking back on the devastation that has taken place in the marketplace, it seems like everyone’s crystal ball has malfunctioned. The effect of monetary tightening by the Federal Reserve to combat inflation has been one of the main disruptors to market developments in 2022. With inflation at its highest level in several decades, the Fed has done this as it could to meet its mandates, raising interest rates seven times, including raising rates by 75 basis points four times in a row. The Fed hadn’t been this aggressive in its policy decisions in four decades. All in all, rates ended 2022 at their highest level since 2007.

In the process, the shares were punished due to lack of liquidity. The Dow Jones Industrial Average ended 2022 at $33,147.25, losing 10% for the year. The S&P 500 index lost 18% to end at 3,839.50, while the tech-heavy Nasdaq composite index suffered the worst of the declines, losing 34% to end the year at 10,466.48 . If you’re wondering why the Dow was able to outperform both the S&P 500 and the Nasdaq by such a wide margin, it’s because the composition of the Dow, with defensive stocks making up nearly 30% of its weighting, has offered some downside protection.

In the case of the Nasdaq, which is made up of high-growth companies, rising interest rates have put pressure on their business. In some cases, the majority of businesses have had to borrow at higher rates to finance their operations, or the consumers they rely on have been forced to cut spending. Take for example FAANG stocks, referencing the former Facebook, now Meta Platforms (META), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google parent Alphabet (GOOG, GOOGL). They have lost an average of 47% of their value in 2022.

Factoring in that Tesla (TSLA) also suffered a 70% decline, 2022 was a nightmare for Big Tech, which collectively lost nearly $4 trillion in market value. Contrast that with the S&P 500, where its 10 worst performing stocks saw a collective drop in value of around $1.6 trillion. Will Big Tech bounce back in 2023? It’s hard to say, given that more interest rate hikes are still expected, let alone a possible recession. Investors will be cautious until there are clearer signs that the economy is on more secure footing. On that note, the only credible crystal ball in 2022 was that of the Fed, which said rates would continue to rise.

The extent of the effect the rate hike would have on equities was unknown, although it was understood that higher rates would exert pressure. It can be argued that even if we place 2022 firmly in the rearview mirror, there is still too much money flowing into the economy. Rates will likely continue to climb in 2023, but at a much slower pace. This constant removal of cash will help over time. Some analysts believe the Federal Reserve can bring the economy to a “soft landing,” meaning that if interest rates continue to rise, a recession could be avoided and inflation will continue to subside.

However, few analysts are ready to predict when the stock market will bottom. After all, that’s the ultimate question, isn’t it? But it should be noted that we are in a bear market. And historically, bear markets, which have been driven by monetary tightening (like this one is now), don’t bottom out and reverse until the Fed begins to cut interest rate. That said, there are plenty of reasons to consider entering the market in the coming weeks, especially since January has historically been volatile on the positive side.

For various factors, including the sale of taxes and the rollout of bonuses, stocks not only tend to rise in January, but so do over the long term, according to Standard & Poor’s data. So with 2023 upon us, I expect, and even welcome, market volatility, as Buffett pointed out. There is a basket of stocks, especially those with strong revenue growth projections and earnings that suffered losses in 2022, to present strong buying opportunities in January and throughout 2023. After all, where there is volatility, there is also opportunity.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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