With a 19.4% drawdown, the S&P 500 just had its worst year since the financial crisis of 2008. The NASDAQ fared even worse after a 33% decline, while the Dow Jones’ 9% dip seemed modest in comparison. Indeed, 2022 was a very bad year – or quite possibly, a terrific setup for 2023.
It’s wasn’t the Great Recession, but rather a Great Rotation from the high-growth names that led the markets since 2009 into perceived safety stocks – hence, the relative outperformance of the Dow Jones over the NASDAQ and FAANG stocks.
Not every so-called crisis hedge was effective in 2022, though. Sometimes safety-focused investors mix in some shares of the TLT ETF, which represents long-term bonds, with their stock index funds. That strategy didn’t work out too well last year, however, as TLT and the stock market indexes plunged in tandem.
Does this mean investors should stay out of the financial markets in 2023? Not at all, as negative years usually lead to positive ones. Granted, the media will gladly provide you with excuses to hide out in cash over the next 12 months.
They’ll point out that the U.S. labor market remains tight and hourly wages are significantly higher than they were a year ago. That’s great news for job seekers, but investors may express concern that the Federal Reserve won’t back off of interest-rate hikes if a tight job market contributes to elevated inflation.
Be assured, though, that the highly efficient financial markets have already priced this in. Those same forward-looking markets will stage a relief rally once they get a hint that the Fed is ready to tap the brakes on interest-rate raises.
If you truly believe in “buy low, sell high,” this is what an opportunity looks and feels like. It looks scary and feels like the world is coming to an end, but successful investing isn’t psychologically easy; otherwise, everyone would be a winner.
Thus, you’ll see pundits going on CNBC and saying things like, “It’s really hard to be positive on tech right now,” and, “The tech is dead narrative is probably in place for the next couple of quarters.” That’s exactly the type of talk that makes me bullish on technology stocks.
Not that I’m buying all of the NASDAQ, or every FAANG stock. Rather, I’m dipping into tech leaders with reasonable P/E and P/B (price-to-book) ratios. After all, it’s not every year that we get such low valuations in selected NASDAQ names.
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I’m also bullish on certain commodities and companies that get them out of the ground. Consider the elements that modern civilization can’t do without: silver and copper immediately come to mind. Lithium and uranium are also worth looking into and, if you’re ready, identifying ways to get exposure to.
It’s still perfectly fine to stay invested in the consumer defensive names that outperformed in 2022. I would go easy on traditional oil-and-gas stocks, though, as they generally went up a lot last year and may be due for a correction or at least some consolidation.
Let’s not ignore gold in 2022, even if many financial gurus did. They didn’t spend much time talking about gold because of its flat annual performance, but keep in mind that gold outperformed many other investment classes.
Meanwhile, Alger’s Greg Adams has some ideas that may prove to be fruitful in 2023. He recommends “dividend leaders” (companies with dividend yields well above that of the S&P 500), “dividend growers” (companies that have consistently grown their dividend payouts for years), and “kings of cash flow” (attractively priced stocks representing companies that generate high levels of free cash flow).
Adams identifies Verizon as a dividend leader, Home Depot as a dividend grower, and Alphabet as king of cash flow. Personally, I like all three of those stocks for the next 12 months. Be flexible and open-minded, though, as Adams notes, “There are often companies that could fit in any of the buckets.”
Flexibility will be crucially important in 2023 as any of the aforementioned stocks and sectors could correct further to the downside before recovering. That’s why scaling into positions gradually is essential, and having valid reasons to buy assets will be an absolute requirement, going forward.
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