By Ryan and Mike O’Donnell, CFP®
Key Takeaways
Our only prediction for 2023 is that it won’t be a boring year.
Wall Street analysts are cautiously optimistic about 2023. But research consensus estimates are historically unreliable.
Now is not the time to stray from your disciplined approach to saving, spending and investing.
A well-constructed financial plan has bear markets, recessions and volatility already baked in.
Baseball legend Yogi Berra famously said: “Making predictions is hard; especially about the future.” That’s how we feel sometimes when people ask me how the markets will do next year.
Sure, we’re all hoping for a rebound after a difficult 2022. But the market doesn’t care that we just flipped the calendar over to a new year. Things will improve only when it sees clear direction on interest rates, inflation, recession-risk and corporate earnings.
While it’s still fairly cloudy out there, the only thing we are willing to predict is that 2023 won’t be a boring year.
A MarketWatch survey of top Wall Street forecasters put the average S&P 500 estimate at 4,031 for the end of 2023. That’s represents a modest gain of 6% for the year, but it might not be enough to stay ahead of inflation or recover the 19% the index lost in 2022. Factset’s survey of over three dozen analysts was a little more optimistic, with a consensus estimate averaging 4,500 for the S&P by year end 2023 -- a gain of 18%.
Both surveys are based on an expectation that stocks would bottom out in the first half of 2023, before rebounding in the second half as inflation slows and unemployment rises. Theoretically this would induce the Fed to start slashing interest-rates without spiking inflation.
Naturally Fed Chairman, Jerome Powell, made it clear he can’t make guarantees about monetary policy. But most rational minds expect to see the Fed ease the pace of rate hikes in 2023, eventually stopping them before year end. However, the Fed’s latest “dot plot,” released in December, suggests that central bankers don’t expect to cut rates until 2024.
While all this conjecture sounds reasonably optimistic, let’s rewind the tape to New Year’s Day a year ago, when the markets were at their all-time high. The same esteemed group of equity analysts predicted an average S&P finish of 5,264 for 2022, which would have been a gain of 12% from the all-time high set on Jan 3 of 2022. That consensus forecast was not just a swing and miss; it was like striking out looking – in T-ball!
Statistically, the odds are in favor of a positive year for stocks. As the chart below shows, the S&P 500 has advanced 13.5%, on average, in the years following a pullback. In fact, the index in positive territory 18 of the 21 times there has been a down year for stocks going back to 1946. If you’re keeping score at home, that 13.5% mean gain is pretty close to the midpoint between +6% (Marketwatch) and +18% (Factset) discussed above.
Just don’t base your investments or financial plan on consensus predictions of where the stock market is heading over the short term. Nobody knows for sure. Doing so is just another form of market timing and that’s not investing, it’s more like gambling (or dart throwing).
As New York Times columnist, Jeff Sommer reminded us recently, the median Wall Street forecast since 2000 has been off by about 13% a year. “These attempts at clairvoyance are stymied by a fundamental problem,” wrote Sommer. “It’s simply impossible to forecast the path of the markets six months or a year ahead with accuracy and consistency, as many academic studies have shown.”
Sommer also pointed to another fundamental problem with forecasting: we have no way of seeing around the corners. In other words, we had no way of knowing that Vladimir Putin would order Russia’s invasion of Ukraine in 2022 — or that fossil fuel companies would end up leading the stock market in 2022 after underperforming so badly in recent years.” So just be ready for more extreme outlier events in 2023.
We hope that our clients know that we have extreme market volatility and occasional bear markets already built into your long-term plans with an appropriate asset allocation that aligns with your risk tolerance and your long-term financial goals. There’s no price tag you can put on that kind of peace of mind.
If you take a step back from all the stomach churning volatility we endured in 2022, you will see that equity investors are still up about 50% since the start of the pandemic and still up about 600% since the depths of the global financial crisis in 2009. Those returns are still very much in line with the long-term historical average annual return of 8% to 10% for stocks.
Conclusion
“Lack of specific knowledge about the future is a fact of life,” wrote Sommer. “Guessing, or betting wildly isn’t a prudent solution.” Bottom line: Stick to your plan and you’ll be fine. Deviate from your plan or start second-guessing yourself and now you’re just gambling. We are happy to discuss any questions you may have about your portfolio or retirement plan during these uncertain times. Please don’t hesitate to reach out.
