Wipe the slate clean. The old year is gone with its disappointments. A new year is here. There are new possibilities.
To be sure, some of the challenges of 2022 could carry over into the new year. However, there is some reason for optimism about the future. Here's why a new bull market is likely in 2023 -- and three stocks to buy to profit if it comes.
Image source: Getty Images.
History rhymes
Mark Twain is sometimes credited as saying, "History doesn't repeat itself, but it often rhymes." I'm not sure if the celebrated author actually ever said or wrote those words. However, they're true even if he didn't.
I think that the best reason to believe that a bull market is coming in 2023 is that history rhymes. In late December, I set out to find out how the stock market has performed in the past after a dismal year like the one we had in 2022.
The S&P 500 closed the year with a negative return a total of 23 times between 1940 and 2021. What happened in the following year? The index rose 19 times and declined only four times.
My analysis was even more interesting when I only focused on the years when the S&P 500 fell by 20% or more. (At the time I did this analysis, the index was down a little over 20% year to date.) Such a steep plunge happened six times between 1928 and 2021. In four of the following years after those declines, the S&P 500 soared by at least 23.5%.
Granted, the future might not mirror the past. Historically speaking, though, the chances of a good year for stocks after a bad year are pretty good. And the odds of a banner year following a horrible year (like we experienced in 2022) are pretty good as well.
Stocks to buy
Let's assume for a minute that this optimistic outlook becomes reality. What stocks should investors buy now to profit from a coming bull market? I suspect that many currently beaten-down stocks will skyrocket. However, three especially jump out to me.
First, I think that Amazon (AMZN -1.65%) will be a surefire winner in the next bull market. The stock is trading at its cheapest level in years. Many investors have thrown in the towel on Amazon because of its slowing growth.
However, the reasons behind this slowing growth are primarily due to macroeconomic headwinds that are only temporary. When a new bull market begins, it will likely be a good sign that those headwinds are abating or will soon die down. That should set the stage for Amazon's business -- and share price -- to take off in a major way.
The Trade Desk (TTD -0.54%) is another once high-flying stock that nosedived last year due to worries about the economy. However, the digital advertising leader actually delivered impressive revenue growth in the third quarter of 2022 despite the challenges.
Management expressed confidence about the company's prospects in 2023 in the Q3 update. If the overall market rebounds, The Trade Desk should rank among the biggest winners.
Returning to our "history rhymes" thesis, small-cap stocks have typically performed especially well in new bull markets. So have the stocks of companies that benefit from steady or declining interest rates (which would likely be present if a bull market materializes). Easterly Government Properties (DEA -1.26%) checks off both of these boxes.
The company is a real estate investment trust (REIT) that primarily leases properties to federal agencies. Easterly's market cap is only $1.3 billion, putting it well below the maximum threshold for a small-cap stock. Increasing interest rates make it more expensive for the company to borrow money to finance purchasing new properties. If interest rates stabilize or fall, investors would likely be much more bullish about the REIT.
Even if not...
What if history rhymes like free-verse poetry (that is, very little to not at all)? The good news is that even if a new bull market isn't on the way in 2023, Amazon, The Trade Desk, and Easterly Government Properties are still great stocks to buy and hold for the long term.
Each of these companies has solid underlying businesses. And with Easterly, you'll get a nice dividend yield of over 7.4% in the meantime. Whether or not a bull market begins in 2023, one will come sooner or later. Patient investors should profit from any of these three stocks.