Updated January 3, 2023
Bill Chen, CFA
As the old Chinese proverb goes: “The best time to plant a tree was 20 years ago. The second-best time is today.” 2023 could be a great time for young folks to get started with an automated investing plan. Consider that 2022 was fraught with volatility in both the stock and bond markets, four-decade high inflation, rising interest rates, a war, crypto blow-ups, a Federal Reserve hell-bent on taking stocks lower, record-high gas prices, Covid lockdowns in China, and housing market turmoil.
Did that have you reaching for a holiday drink or two? Indeed, we’ve all endured a lot of stress in the financial markets over the last year – whether you have been an investor or just a consumer in this tough economy.
But, it’s often when pessimism is high that favorable buying opportunities present themselves. While more volatility is still likely in the coming months, 2023 should prove to be a great year to get started investing. Let’s run through some reasons why we think that’s the case.
1. Better valuations
Warren Buffett famously quipped, “Price is what you pay, value is what you get.” Now that stocks have fallen sharply from their early 2022 all-time highs, shares of many companies are at much better prices when compared to their long-run expected earnings. While the first half of 2023 could feature the dreaded “R” word (recession) and weak near-term corporate profits, there’s no doubt that an eventual recovery will be in store. That makes buying during these volatile periods a smart move for your long-term portfolio.
As it stands, economists expect near 0% real GDP growth during the first half of 2023 and the S&P 500’s earnings to potentially fall upwards of 10%. While that drop in per-share profits makes the market look more expensive in the short run, we often see a big bounce back in profitability once the economy regains its footing. Buying in advance of such recoveries, rather than waiting for the dust to settle, is important since the stock market usually moves in advance of the economy.
2. The Fed might not be our foe much longer
High inflation is always the nemesis of the Federal Reserve. The group’s mandate is to promote price stability while keeping employment as high as possible. In 2022, inflation clearly got out of hand. After a decade of relaxed monetary policy and low inflation pre-Covid, policymakers were lulled into thinking that consumer prices would rise at a moderate rate indefinitely. This past year has been a rude wake-up call for members of the Federal Reserve. As a result, Chair Powell has all but said he wants stock prices to come down in an effort to stymie the rate of inflation.
The good news here is that there are signs that the CPI rate has peaked, though it is still too high. Eventually, the rate of consumer price increases should retreat to reasonable levels – perhaps even by year-end 2023, according to many forecasters. If that’s the case, then the Fed could even reduce interest rates. According to the CME Group, traders have priced in nearly three full rate cuts during the back half of 2023.
3. Investors are sour on stocks
Another reason that 2023 could be a time for excitement about stocks is that most investors are just so downbeat. Sentiment data from the American Association of Individual Investors (AAII) show that 2022 has been the most negative year on record.
Part of good long-term investing is recognizing that the herd is often wrong. In this case, such bearish feelings towards the stock market should make you want to zig when the consensus is zagging - that means you should be optimistic about putting cash to work in the market in 2023.
4. Pre-election year tailwinds
Historical trend analysis can be useful when assessing where the S&P 500 might trend in the near term. One of the most popular and widely cited cycles lately is how equities perform around elections. For background, the S&P 500 tends to do well in the year after a midterm election. That rally often extends through the so-called pre-election year (which would be 2023) and into the middle part of the election year (2024). Getting in on the market earlier rather than later next year would capture most of that possible uptrend.
5. Investing is easier than ever
We’ve talked a lot about market details and other complicated investing issues. Let’s take a step back and return to our original premise that the more time you’re invested, the better off you’ll likely be when it comes to building wealth. With efficient investment products, diversified funds, technology, and industry competition, you have the ability to hold a strong global portfolio of assets at a very low cost. With just a few taps on your phone, you can be in the game and on your path to financial freedom.
While anything can happen in markets these days, the data show that the longer your time horizon, the greater the chance you will see positive returns. To drive home the point, since 1929, just 6% of all 10-year stretches have had negative returns. Those are some favorable odds of seeing green!
What can make investing in stocks feel so risky, however, is that 26% of all one-year periods have a negative return. Shorten your timeframe to just one day, and the chance of seeing red in your portfolio jumps to 46%.
The point: investing today could feel scary to you, but the evidence shows that getting started investing in 2023 should reap rewards over the years and decades ahead. As we like to say, investing, brick by brick, is the key to building wealth. We encourage our clients to take advantage of accounts like a 401(k) and IRAs while automating the process of investing.
The Bottom Line
While volatility will probably persist in 2023 and a global recession could even strike, we see reasons to be hopeful in the new year. The next 12 months should provide strong entry points for investors with a long-enough time horizon. Still, risk must be managed. Allio’s automated portfolios help you invest like a pro and grow your net worth.
Our experienced hedge fund veterans pay close attention to what’s happening in the global economy to ensure your money is strategically aligned with your risk and return objectives.
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