There has been a lot of buzz regarding what next year's market will bring after such a dismal showing in 2022.
Some think we could see a recession next year, which might bring more losses. Others see the picture getting brighter, with more encouraging inflation data and the Federal Reserve recently having made a minor pivot at its final meeting of the year. There are even some who simply think the market will end the year roughly flat in 2023, meaning no bull or bear market.
The reality is that nobody can predict the future, because there is so much uncertainty in the environment and so many puts and takes that could affect things one way or the other. But whether we see the bull or the bear next year, investors should do this one thing regardless.
Stop thinking short-term
Since the pandemic started, markets have been incredibly volatile. Remember the months right after the pandemic hit in March 2020, or the monstrous year markets had in 2021.
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Additionally, lots of people who had never invested began to do so, especially among the retail crowd, which created a wave of excitement and FOMO (fear of missing out). Riskier, short-term trading became more prolific with the way markets were behaving -- and I don't think anyone, including myself, can say it wasn't enticing with markets seemingly going nowhere but up for much of 2021.
But after a sobering year in 2022 to level things out, investors need to forget about short-term trading and focus on long-term investing next year, regardless of whether there's a bull or bear market. The reality is that recessions are more common than you might think, and the market tends to get antsy if there isn't one in a 10-year period.
Plan for a recession
With the typical investor likely to see multiple recessions over a lifetime, you really need to invest with recessions in mind.
The goal shouldn't be to determine whether or not a company you own can thrive in a recession (not that it wouldn't be a bonus), but whether the company you own can successfully navigate a recession without losing its positive long-term outlook.
That means searching for companies with healthy balance sheets, including lower levels of debt. They should also be profitable and generating free cash flow. You'll want to find companies with products or services that can handle at least some level of inflation, because inflation can lead the Federal Reserve to raise interest rates, which can ultimately slow the economy and sometimes put it in a recession.
For instance, companies with strong brands (like Apple) have such customer loyalty that their customers barely blink if they raise product prices. There are also business models that can hedge inflation. Think about a company like Visa. The large payments company charges a fee on transactions processed through its network, so higher prices mean higher fees.
Lastly, don't let a few short-term earnings hiccups derail your thesis if they're temporary. No company is going to be perfect every quarter. But if its long-term business model is intact and consistently makes incremental improvements, then the company will likely be generating steady profits five or 10 years down the line.
Reset your approach
Markets have been highly irregular over the last few years, and they may continue to stay that way as we head into 2023. But almost no one really knows how things will play out next year. Markets are extraordinarily hard to time even for the best of the best.
Take this moment as an opportunity to get back to the basics of looking for companies with strong long-term fundamentals that can survive a recession.
Think about this: If you had invested $5,000 in the S&P 500 in the year 2000 and not touched that money, it would now be worth more than $20,125. During this time, markets have gone through the dot-com crash, the Great Recession, and now the pandemic. That's the magic and simplicity of long-term investing.
