2022 has been an annus horribilis for stock markets across the globe. The darlings of the stock market over the past 10 years, US tech stocks, have had a terrible year. This has resulted in double-digit declines for both the S&P 500 and Nasdaq Composite. Yet the FTSE 100 has been broadly flat.
Investors are now turning their attention to 2023. Could this be the year when stock markets rebound? Will growth stocks reassert their dominance or will value continue to outperform? And what could a likely recession do to stock prices?
Inflation will cool off
My first prediction is that inflation will come down in 2023, particularly throughout the second half of the year.
The Federal Reserve and the Bank of England (BoE) have repeatedly stated that their number one mission is to get inflation down. The Fed in particular has been very aggressive with its interest rate policy.
The Fed Funds Rate, the equivalent of the BoE base rate, has risen by nearly 4% in 11 months. The terminal rate will likely be in the range of 5% next year. The big unknown is how long the economy can stomach this before something breaks.
What’s becoming patently obvious is that surging interest rates are leading to an economic contraction. History shows that recessions never fail to bring down inflation.
US tech stocks to fall further
I have for some time argued that tech stocks are in bubble. Valuations may have come down in 2022; unfortunately, I don’t see any grounds for optimism in 2023.
When the dotcom bubble begun to burst in early 2000, price-to-earnings multiples of tech stocks fell heavily. By 2001 the bubble had fully deflated. However, the market didn’t bottom until 2002. The further declines witnessed in stock prices back then were driven mostly by earnings surprises.
Today, we have a similar set-up. A lot of the froth has come out of the sector. The concern now is that the real pain in real economy businesses will hit earnings of tech companies. We’ve already seen what happened to Amazon’s stock price when it reported disappointing earnings earlier this year.
One stock that particularly concerns me is Apple. Today, it’s trading at 22 times forward earnings. As consumer disposable income falls and relations between US and China worsen, I expect its earnings estimates to come down.
Gold will outperform the market
Despite my overly bearish stance toward the general stock market next year, I remain bullish on certain sectors.
Mark sentiment toward gold might be low but I’m predicting that there will a rush into safe-haven assets in the New Year.
The traditional 60:40 stock and bond portfolio has performed miserably in 2022. At the same time, we have seen gold steadily supplanting US Treasuries as the preferred allocation among global central banks.
There are a number of ways I can gain access to the yellow metal. My preferred way is through buying shares in established gold mining companies. That way I’ll receive a dividend.
Two FTSE 350 miners I particularly like the look of is Fresnillo and Centamin. Both have witnessed heavy share price falls this year but have recently begun turning up.
