2022 was the worst year for the stock market since the financial crisis, fueled by a combination of rising interest rates, economic worries, war in Ukraine, inflation, and other factors. As of Dec. 20, the S&P 500 was down by more than 19% for the year.
However, with the year coming to a close, what should we expect for next year? While nobody has a crystal ball, here are a couple of my predictions for the stock market in 2023 and why I believe each one is likely.
1. The stock market will have an excellent year
My bold prediction is that the stock market will rebound sharply in 2023, with a 20% gain (or more) in the S&P 500 benchmark index.
There are a few reasons I think this is quite probable. For one thing, I feel the Federal Reserve will manage to get inflation under control faster than most experts seem to think. In fact, the Fed may have already tamed inflation if we look at the month-over-month core inflation rate of just 0.3% in November. Lower inflation could lead to the Fed lowering interest rates sooner than expected, and this lower inflation would likely lead to lower consumer interest rates for things like mortgages.
Additionally, remember that the stock market hates uncertainty, and there's a ton of it right now. Many investors are worried about a recession, a housing crash, and more. If we get some clarity as to where the economy is heading, it would almost certainly be a positive catalyst for the market.
Finally, let's look at the historical performance of the stock market after a losing year. Since 1965, the S&P 500 has produced a negative total return 12 times (not including 2022). In nine of the 12 cases, the S&P 500 ended the next year higher. Even including the negative years, in the average year when the S&P finished the year in negative territory, the following year saw a total return of 13.1%. In short, the historical data supports a stock market rebound.
2. Some of 2022's worst performers will be 2023's standouts
While I foresee the stock market having a strong year in 2023, I also think we're going to see some of 2022's biggest losers be among next year's biggest winners.
One big example is e-commerce, with Amazon (AMZN 0.58%) being a particularly interesting stock to watch. The massive company has declined by nearly 50% in 2022, giving back all of its pandemic-era gains, on fears of a slowdown in consumer spending, rising costs, and more.
Homebuilders are another example, with the SPDR S&P Homebuilders ETF (XHB 0.14%) falling by nearly 30% in 2022. Soaring home prices, combined with mortgage rates more than doubling, have resulted in lower demand and higher cancellation rates. If mortgage rates end up declining in 2023, which I believe to be quite probable, it could be a major catalyst -- especially if materials costs remain low, as lumber prices just hit their lowest level since 2020.
How confident am I?
Now, I'm not an eternal optimist when it comes to the stock market by any means. In fact, some of my 2022 stock market predictions were rather negative (and turned out to be correct).
However, with signs that inflation is moderating, a strong job market, and pent-up demand for large purchases once interest rates decline and recession fears subside, there are some good reasons to believe that the market will have a strong 2023.
Having said that, there is a lot that could go wrong. There's no guarantee inflation will be under control, and there's a significant chance that we'll see a deep recession (or "hard landing," as the Fed calls it). Only time will tell, but I'm confident that the most likely direction for the stock market in 2023 is higher.
