For 2022, I wrote a very comprehensive all-in-one forecast piece, “My 2022 Futile Forecast: The Dollar, Stocks, REITs, Crypto, Inflation.”
This year I am breaking things apart into several articles for my followers and subscribers. Today, we cover the stock market.
Here’s what I said last year:
The S&P 500 will break 5000 and 4000 in 2022, while likely ending near the lows of the year…I think the S&P 500 will hit both low 5000s and middle 3000s in 2022.” Kirk Spano on 2022.
So, I was just a bit high on forecasting 5000 for the S&P 500 Index (SP500), being off about 4%. But, I pretty much nailed the low in the middle 3000s, which was 3491.58 for the year. And, we are much closer to the low to close the year than the high.
Most importantly, in January of 2022, I told subscribers to get very heavy in cash for the short-term.
This year will be a story of getting fully invested again if you are not. It is also a story of upgrading your portfolio with an eye on the future which will be “4th Industrial Revolution” technology heavy, moving towards decarbonization and seeing dramatic improvements in emerging markets.
2021-22 Macroeconomics Past
In my irregular “Macro Dashes” pieces (going regular by popular demand in 2023), I have been covering the important economic issues underlying the stock market:
October 2021 – Macro Dashes – Millennials Are The Market’s Most Important Money
November 2021 – Macro Dashes – Inflation Is Transitory, Most Prices Are Permanent
December 2021 – Macro Dashes: The Fed Is Reloading Its Bazooka For Next Time
September 2022 – Macro Dashes: SPY Should Double Bottom Or Worse On Energy Inflation (NYSEARCA:SPY)
September 2022 – Macro Dashes – The Fed Could Cause Stagflation Next
The Millennials article tracked that most of the “new money” in the stock market is coming from the Millennials which is now the biggest generation. That is having a profound impact on what gets higher valuations.
In the Inflation piece, I pointed out that supply chains and energy prices were the main drivers of inflation. Data afterwards confirmed that.
I also said it would take up to 2 years for inflation to cool down, primarily targeting the end of 2022 and Q1 of 2023 on energy comps. Mind you, this was October 2021. One commentator was horrified at the thought of 2 years of inflation…
I went on to describe how the Fed was reloading its bazooka for the next financial crisis or recession, that it might in fact cause. How does that look now?
Then, I suggested a double bottom in 2022 on energy prices. The S&P 500 essentially matched it’s summer bottom a month later.
Most recently, I was worried about the Fed causing stagflation. That is where my fears are now. So, let’s pick up there.
2023 Macroeconomics Present
A number of past and present Federal Reserve Presidents have talked very publicly about the need for the stock market to return to rational valuations, as well as, for inflation to be completely controlled.
Read Chairman Powell’s last few statements, there is no doubt he is focused on inflation, even if it causes some employment hardship and essentially dismisses the stock market conditions. He is clearly not cajoling the stock market the way that prior Chairperson Janet Yellen did.
So, inflation takes priority over employment, and a weak stock market crash is essentially welcome, even hoped for.
Traditionally, that would mean a high unemployment recession is coming. I do not think that is true this time.
Here are the 4 most important words I heard in Powell’s post rate hike comments a couple weeks ago:
We need more people!” – Chairman Powell December 14, 2022
The labor market is so tight (how tight is it), that Powell has a lot of cover for keeping rates higher and continuing with quantitative tightening in order to fight inflation – real or perceived or just worried about.
That is not good for stocks.
There is no doubt that Chairman Powell is fully aware that the rate of inflation has fallen recently.
But, he is also aware that China could pullback on economic production again, causing supply side inflation, even though at the moment, they are pulling back on Zero Covid. Rope-a-dope?
Powell also knows there could be another energy shock once winter is over. More Russian aggression or Middle Eastern war?
I will cover these topics more in future Macro Dashes pieces, but for now, to set the backdrop for my stock market forecast, here’s what I see in 2023:
- A Fed pause on raising rates sometime in Q2 or Q3.
- QT carrying on until, at least, September or Q4.
- Tightening financial conditions into autumn.
- GDP likely to be negative in Q1 and under 2% for full year.
- Unemployment staying under 5% (giving cover).
Here’s the short story:
The Fed can not afford to loosen before it knows what is going on internationally in supply chains and energy markets. Unemployment is unlikely to be a problem before autumn, so, the Fed can stay hawkish longer. It is that simple.
That means through at least the U.S. drive season, we can expect a choppy stock market.
That is not bad for the economics though. If we avoid international shocks, then we have a firm dollar, lower inflation and full employment. Sounds pretty good doesn’t it?
I am not going to dive into this much now, as this is a 2023 forecast piece, but, the U.S, of course has a lot of financing work to do in coming years.
The U.S. has a trillion dollars to refinance in 2023 and a half trillion over each of the next 4 years. That means we must at least stay tuned to the sausage factory budget process.
Inevitably, America will need QE to prop up our finances again.
I had always projected that for late 2020s as the last Baby Boomers got onto Medicare and Social Security, but, various reports from think tanks, investment banks, NGOs, government offices and academics that should have some credibility, are suggesting maybe a bit sooner on the eventual Boomer Bust.
Topics for future Macro Dashes.
The S&P 500 In 2023
Let’s get straight to the point.
I think the S&P 500 will begin and end the year in about the same place.
In between, I think we see a low around 3000, likely a bit lower.
At some point, probably around 3000 on the S&P 500, we wee the Fed start to pivot towards financing debts versus controlling inflation, which is hopefully subdued by then.
For purposes of making a hard and fast number prediction, I think earnings on the S&P 500 drop 5-10% on slower growth, firm input prices and slightly higher labor costs. Here’s what FactSet saw last quarter.
Earnings actually fell year-over-year and I expect that to continue for at least a couple quarters before flattening out in Q3 or Q4. Regardless, that is lower for the full year. The stock market has not priced that in.
I expect a lot of earnings resets in Q1 and Q2. My forecast is the full year coming in closer to $210, than 5.8% higher around 240, that analysts on aggregate (FactSet) are forecasting.
If we apply a 14 P/E, which is typical of slowdowns, that gives us a market bottom about 2940. By then, owing to no shortage of liquidity and a Fed pause by then, I see a similar magnitude rally into a year-end S&P forecast of 3940. I’ll make that my official educated guesstimate for a year-end S&P 500.
By now we should all have recognized that the stock market is not perfectly rational and almost never right on time. Investors are regularly early and late to the game.
That is why technical analysis has value. It helps us be closer to on time.
So, here is a chart I keep for my subscribers. I am very partial to quantitative money flow indicators because my grandpa, dad, uncles, old man neighbors who I picked up racing forms for, first landlord, professors, employers, etc… all told me some version of this…
If you want to know how things are working, follow the money.”
So, technically speaking, the SPDR S&P 500 ETF (SPY) is targeting an area near 3000 for the bottom of this bear market.
The above chart has some important information, but I know most people do not understand charts, so, I’ll explain some of this.
First off, this is a chart based on monthly time frames. That is long-term with measurements based on month end vs weekly or daily or hourly or even faster measurement periods.
I am using the monthly measurement time period to show me the very big long-term full cycle trends. I use shorter time frames once this chart is near its edges versus what I call “the middle of the market” to find buying points.
Right now, we are in the “middle of the market.” A bear market.
RSI, MFI and Chaikin Money Flow are all heading down, but not at typical bottom areas yet. Close, but not quite. With bear market rallies, we should be looking at Q2 from a stock market bottom that finally gets panicky.
The top orange dashed line represents about the best, or highest, I can see a firm bottom being put in. I doubt that holds.
If you scan to the far left, you see volume profile. That measures interest in buying and selling at certain prices.
In short, when the bars are big, that means institutional buying or selling. When the bars are short, that’s us retail shrimps who represent 10-20% of the market money over time.
You can see just under the top orange dashed line rising interest in stocks. That could be bullish or bearish interest. Based on my macroeconomic analysis above, I think it more likely represents an acceleration in selling.
That leads to my bottom orange dashed line. That’s about where I think a firmer bottom is put in. Why there?
Well, buying pressure tends to move up over time. So, I have moved one interest level higher versus where interest was before when it was a level lower. Essentially, inflation over time due to increasing money supplies and increasing global wealth.
I also thing that is about where the Federal Reserve stops being so mean.
Here I want to point out that picking out the right time frame to analyze is very important.
I have been saying to subscribers for a few years now that the 2014-16 choppy market is the “base level” for the recently dead bull market and current bear market. You’ll see a purple dashed line down there. That’s “as bad as it could get” in my opinion.
Notice I title that region the Armageddon Zombie Apocalypse or Jeremey Grantham Zone.
Armageddon Zombie Apocalypse is pretty self-explanatory. It’s where really bad economic things are happening. Real “financial crisis” stuff. I do not think it is likely, but it is more likely than normal in my opinion.
That is impossible to quantify because we have magical central banks now, but, if old economic theories matter, we have some debt, leverage and counterparty risk out there again.
If you do not know who Jeremy Grantham is, well, you should. Look him up.
Here’s a very interesting recent piece: Entering the Superbubble’s Final Act
Catalysts For A New Bull Market
There will be a few catalysts for a new bull market. The first will be the Federal Reserve backing off of its hawkishness. Again, I see that in Q3 or Q4.
The stock market will anticipate a lovey-dovey Fed once we have been in our panic room for a little while. This is why I do not see a significantly down year, even though I see a new bottom being put in.
Here’s why the Fed will back off, and it’s directly related to the macroeconomics discussion above:
- Russian energy becomes less important over time.
- China has to produce to keep their masses happy and make a buck.
- Employment is tight almost everywhere.
Importantly, global wealth is still massive and growing generation to generation. Yes, it grows more when central banks are nice, but let’s face it, there has been so much money printed they can not really pull it back in without triggering a debt and liquidity crisis.
So, with so much money being created from Buck Roger’s debt, we will see nicer central banks soon after most people believe we won’t see nicer central banks. As us 1980s Gen Xers used to say, “PSYCHE!”
The Great Divergence
A topic I have discussed with subscribers is what I am calling “The Great Divergence.” What is that?
Simply, “The Great Divergence” is what others are calling Decarbonization, Digitization and Decentralization
Search the web and you can find many variations of this theme.
Decarbonization, Digitization and Decentralization is where the big money is going. It’s where your money should be going too.
I specifically and repeatedly discuss the following with clients and subscribers:
- 4th Industrial Revolution technology and its impact on almost every industry.
- Clean energy from solar, batteries and EVs to carbon capture.
- Changes in real estate markets from the hybrid work world.
Because of this great divergence, I NEVER buy the SPDR S&P 500 ETF (SPY) or Vanguard S&P 500 ETF (VOO). I can do better not being invested in 100-200 companies found in the S&P 500 that are destined to shrink and be cast out for market cap, profitability, mergers of the sick, and in some cases, bankruptcies the next decade.
I would rather invest in:
- the Invesco QQQ (QQQ) where 70-80% of corporate cash sits
- SMID caps with good or improving finances that have growth.
- Emerging Markets with demographic, technological and resource edges,
- REITs that benefit from secular trends and don’t suffer much from higher interest rates.
More on where I prefer to invest coming.
- Editor’s Note: This article was submitted as part of Seeking Alpha’s 2023 Market Prediction contest. Do you have a conviction view for the S&P 500 next year? If so, click here to find out more and submit your article today!