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Wall Street investors had a miserable 2022. What’s ahead for 2023?

Among market watchers there’s a strong consensus

Photo (c) Recep-BG - Getty Images
When all was said and done, 2022 was the worst year for stocks since 2008, at the start of the financial crisis. So what exactly does 2023 have in store for investors?

Opinions vary, but there is one consistency. Many market analysts expect stocks to continue to decline in the first half of the year. What happens after that is subject to debate.

The Federal  Reserve had a major impact on stocks in 2022. After raising a key interest rate seven times, all the major stock averages reached their lows for the year. High flyers like Tesla fell from a high of around $350 a share to around $120 on the last trading day of the year.

Large-cap technology stocks like Alphabet, Apple, and Amazon saw sharp declines, especially in the last month of the year. All of those stocks surged in 2020 and 2021 when the Fed slashed rates to zero, making it very easy to borrow money to expand. Now that money is no longer “free,” technology growth stocks are seen as having less value.

Patrick Armstrong, chief investment officer at Plurimi Wealth, says the market already has priced in the Federal Reserve’s policy of pushing up interest rates to slow inflation. In 2023, he sees a different set of influences.

Back to fundamentals

“I think it’s not going to be the Fed determining the market,” Armstrong told CNBC’s “Squawk Box Europe” on Friday. “I think it’s going to be companies, fundamentals, companies that can grow earnings, defend their margins, probably move higher.”

If the Fed is less important, market watchers say economic factors will play a greater role, especially in their impact on corporate earnings. If higher interest rates push the economy into a recession, that is likely to reduce corporate profits, which in turn will drag down stock prices.

In a late-year survey by the accounting firm KPMG, 91% of company CEOs said they are convinced we are heading toward a recession in the next 12 months. At the same time, only about a third of U.S. CEOs believe the downturn will be mild and short.

For these and other reasons, it is easy for those who follow the financial markets to agree that the first six months of 2023 will not be particularly pleasant. In fact, some things will get worse before they get better.

Another 25% lower?

Analysts at investment bank Morgan Stanley estimate the S&P 500 could drop to a range of 3,000 to 3,300 in the first three months of the year. That would be a loss of around 25% from its December 2022 levels.

At JPMorgan, analysts have a similar view. The bank has issued a forecast calling for stocks to drop sharply in the first half of 2023, then start to rebound around June. That’s when they expect the Fed to “pivot” from its aggressive raising of interest rates, motivated by an expected decline in inflation, coupled with an anticipated rise in the jobless rate.

Perhaps more than in recent years, the start of 2023 may be an excellent time to consult a trusted and objective financial adviser about strategies and any changes to portfolios.

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