“I am pleased to see the efforts of hypothetical speculation, because by the collisions of different hypotheses, truth may be elicited and science advanced in the end." – Thomas Jefferson
According to a recent Ipsos survey, more than half of Americans (51%) described 2022 as a bad year for themselves and their family, and even more (81%) say it was a bad year for our country. By now, we all know the reasons why. However, according to the study, even with all of the negativity and uncertainty surrounding the future, two in three Americans (64%) expect to have a better year in 2023 than they did in 2022.¹ Americans may be hopeful by nature, but perhaps it is more a case of challenging many of the current narratives from the media and Wall Street. What if the pundits’ negative forecasts for 2023 are wrong and many of their predictions don’t come true? It could dramatically change the way the coming year goes for investors and savers.
The following are some scenarios to consider as we look ahead to 2023:
1. What if the economy isn’t as bad as many are suggesting? Even with the current market uncertainty, The Institute for Supply Management (ISM), a well-respected source of economic data and important barometer of the economy on Wall Street, is optimistic of gains in manufacturing revenue. In fact, they forecast 3.1% growth in manufacturing revenue in 2023 according to the semiannual economic forecast issued in December.² January’s unexpectedly strong jobs report provided additional evidence that the economy might be in solid shape as we begin the year. We’re also keeping a close eye from here on earnings reports as a further indication of the economy’s health.
2. What if Federal Reserve Chairman Powell doesn’t raise rates as high as many are anticipating? At most, only 1.25 percentage points of rate hikes seem to be on the table for 2023. That’s nowhere near the 4.25 percentage points of rate increases Fed officials approved in 2022 alone. That’s progress, right? And it might support the belief of certain experts that the stock and bond markets reached an important technical low in October 2022.
3. What if Elon Musk is successful in his efforts to revitalize Twitter? After Musk’s purchase of the company, Twitter laid off a significant portion of its staff in an effort to right-size operations. Following the layoffs, it seems that Twitter continues to operate as well as it did with a larger staff, at least based on the user experience. In recent months, other big-tech companies have pursued similar staff reductions.
As we are now seeing, investing in technology stocks can be a double-edged sword. Companies living on the cutting edge of innovation have many advantages. Owning their stock allows investors to participate in gains from breakthroughs that can revolutionize computing and the internet.
However, their lofty valuations are often based on the prospect of cash flows that might not materialize for many years. They also face disruptions from increasing competition, rapidly evolving consumer and user preferences, and a changing regulatory environment. While Twitter is now private under Musk, it could become an example for others in the sector to consider the pros and cons of operating as a private entity. Or, on the other hand, ongoing efforts to turn around the company could set the stage for Twitter to become a public company again in the future. Considering Musk’s track record with Tesla – now worth more than GM and Ford combined – he surely has a bigger objective than many are realizing. And, if successful, the stock market – and perhaps companies both inside and outside the technology sector – will respond.
4. What if China doesn’t prove to be the big bad wolf everyone is fearing? In reality, China has enormous economic problems of their own. They are facing strong headwinds due to their aging population and highly speculative real estate market that has deteriorated materially in recent decades. As a result, the Chinese economy may be compelled to reopen to western businesses and investors.
You may recall, the end of the Cold War with the Soviet Union brought a ’peace dividend’ that led to twenty years of prosperity in the US. The reopening of China could clearly be a plus for our economy. If China does reopen, could a larger bull market follow? We will be watching these developments closely and considering how it could impact domestic and foreign markets.
5. What if the Securities and Exchange Commission (SEC) softens its planned rules requiring companies to disclose the effects of extreme weather and other costs related to global warming when the regulator completes its climate-change proposals? The regulator is reportedly looking again at the financial reporting aspect of their climate-disclosure plan, following pushback from investors, companies, and lawmakers. ⁴
One provision that has faced scrutiny is the requirement of large companies to disclose emissions from their supply chains and other indirect sources. Perhaps with the administration now conceding that oil will still be a necessary part of our economy for several years, investors may be comfortable buying energy stocks for the foreseeable future. The S&P 500 Energy index, composed of the energy companies listed on the index, generated a 61.3% return in 2022 including dividends. ⁵
6. What if the news and financial media become less biased and move their reporting from right leaning or left leaning to the center? A recent survey shows that 40% of CNN viewers believe the network has shifted to a more centrist tone.⁶ As a result, more CNN viewers (35%) say the change would make them watch more than watch less (17%). These results indicate a clear appetite for less divisive and polarized reporting of the news. One thing I remember most from coaching hockey is that to win, you need to be strongest down the middle. If indeed inflation has peaked, causing some to believe brighter days are ahead for the economy and markets, what would it mean to our outlook if partisanship has peaked as well?
The results of these “what ifs” are still unknown as we move through the first quarter of 2023. We don’t know for certain whether things will improve and by how much. But the Stock Market is typically the best prognosticator. It is important to note that since 1928, the S&P 500 Index has fallen for two straight years on only four occasions: The Great Depression, World War II, the 1970s oil crisis, and the bursting of the dot-com bubble at the start of this century. What if the odds work in our favor?
Looking ahead 6 to 9 months, we will likely be engulfed in the next Presidential election. There will be no shortage of distractions from our 2023 objectives. But considering “what if” scenarios can increase our ability to set financial goals and navigate change as it happens.
Thanks for reading,
¹ Ipsos | Global Advisor Predictions 2023 https://www.ipsos.com/en-us/news-polls/ipsos-global-predictions-2023
² December 19, 2022 Supply Chain Management Review https://www.scmr.com/article/ism_december_report_optimistic_about_2023_growth_prospects
³ August 30, 2022 When will China’s population growth go negative? https://demography.hedgeye.com/publications/briefings/newswire/2022/august/29/2910-when-will-chinas-population-growth-go-negative?
⁴October 19, 2022 Bloomberg https://news.bloomberglaw.com/securities-law/sec-climate-rules-pushed-back-amid-bureaucratic-legal-woes
⁵ December 29, 2022, Forbes Energy Stocks Outshone Peers in 2022 https://www.forbes.com/sites/dereksaul/2022/12/29/energy-stocks-outshone-peers-in-2022/?sh=a062815466e5
⁶ Variety.com October 18, 2022 https://variety.com/vip/survey-viewers-detect-centrist-shift-at-cnn-1235406284/
This material has been provided for general, informational purposes only, represents only a summary of the topics discussed, and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice or recommendations. Rather, they simply reflect the opinions and views of the author. D. B. Root & Company, LLC. does not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation. There can be no assurance that any particular strategy or investment will prove profitable. This document contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information derived from such sources, and take no responsibility therefore. This document contains certain forward-looking statements signaled by words such as "anticipate," "expect", or "believe" that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. As such, there is no guarantee that the expectations, beliefs, views and opinions expressed in this document will come to pass. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. All investment strategies have the potential for profit or loss. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The impact of the outbreak of COVID-19 on the economy is highly uncertain. Valuations and economic data may change more rapidly and significantly than under standard market conditions. COVID-19 has and will continue based on economic forecasts to have a material impact on the US and global economy for an unknown period.
David B. Root, Jr.