Let’s be honest: 2022 was a difficult and unpleasant year. The investing environment hasn’t altered just because the calendar has. In 2023, we’re still dealing with the same issues we were in 2022, which puts investors at risk.
Equities were negatively impacted by the 20 percent decline in the S&P 500 and the 33 percent decline in the Nasdaq. The Nasdaq has typically kept up with the S&P 500 on the downside while exhibiting more upside potential because of the financial clout of mega-cap tech. In 2022, such was not the case. Bonds experienced one of their worst years ever, and cryptocurrencies took a beating as well. In reality, the bond market in many respects suffered its worst year since 1900.
Even though we will eventually get out of this crisis, what investing risks remain?
One of the biggest investment dangers as 2023 approaches is a recession. Whatever your opinion of the economy, a recession in the world would damage more than simply the tech sector. Although the tech sector is now experiencing its own recession, as advertising, consumer, and investment spending fall, the sector will experience new challenges. Although consumers have proven to be tough, their endurance is limited.
Given the strength of the American consumer compared to that of other consumer-based economies, making the recession a global one, as opposed to merely a home one, makes matters worse for international corporations. The positive news even if there may be a recession, is that the stock market typically bottoms out before the economy does. As a result, we may not be too far from some positive stock market news.
The economy will continue to suffer if inflation is not brought under control. Even while prices are declining, there is still a chance that we could experience extremely high inflation.
Thankfully, that doesn’t appear to be the course we’re now taking. However, if inflation persists in staying stubbornly high, it will reduce consumer purchasing power and keep costs high for businesses. Consider the impact that high fuel or logistical expenses have on customers, then consider the businesses that ship millions of goods around the world.
Don’t resist the Federal Reserve is the one thing we want investors to understand. Yes, rising interest rates can cause stock prices to rise. When deciding whether traders and investors should hold long, flat, or short positions in stocks, there are more factors besides the Fed to take into account.
However, risky assets like equities typically perform poorly when the Fed is aggressive. The poorer a stock performs, the riskier it is. The Fed has been accommodative for the majority of the past 10 to 12 years, according to our analysis. That is to say, it has generally been dovish.
In the third quarter of 2018, it made an effort to change its tone. A few months later, in December, the S&P 500 and Nasdaq had declined by 20 percent and 23 percent, respectively. It was completely destroyed.
A three-month 20 percent fall was severe given that the S&P 500 saw a peak-to-trough decline of 27,5 percent in 2022, which took place over the course of nearly 10 months. Stocks have suffered as a result of last year’s shift from dovish to hawkish.
Therefore, the risk is rather straightforward: Stocks are in danger if the Fed continues to be excessively hawkish. The Fed is anticipated to raise rates slightly from present levels for the time being, then hold them steady for the majority of 2023.
The US currency is another risk associated with our investment strategy. The US Dollar Index (DXY) and the Invesco DB US Dollar Index Bullish Fund (NYSEARCA:UUP), both of which did well in 2022, can be used to track this. While a strong dollar may be advantageous for tourists travelling abroad, it is not advantageous for multinational corporations with a global reach. The value of those companies’ foreign profits has decreased, which has a negative impact on earnings. Additionally, as we previously mentioned, as valuations generally decrease, lower earnings tend to be correlated with lower stock prices.
Last but not least, remember that volatility is still a significant risk for investors this year. The S&P 500 recently went through a miserable year. Bond prices have fluctuated along with rates, currencies, and many other asset types.
Although volatility isn’t always a bad thing, it can lead to investors making terrible, irrational choices. Maintaining a larger-than-usual cash position on hand and choosing smaller position sizes are two strategies to combat that.
Just be aware that increased volatility has the potential to cause abrupt and unexpected movements, and investors must find measures to mitigate these risks.
In 2023, there will still be a lot of investment dangers and a high possibility that volatility will continue, giving investors another giddy year. — Moneyweb