Last year, the S&P 500 produced a negative return of 19%, its worst yearly performance since 2008. A market boosted by loose monetary policy changed direction when the Federal Reserve started tightening it in response to soaring inflation.
After the market has a down year, as it did in 2022, many investors wonder what the new year will bring. It's best to remain optimistic. With this in mind, here's a genius move to make as we look at 2023.
Where are the bulls?
With inflation, as measured by the Consumer Price Index, showing signs of cooling down, many market spectators are wondering when the central bank will pause its rate hikes and even reverse course. The hope is that this will happen sometime in 2023, which would be a boon for stocks.
Lower interest rates mean lower borrowing costs for consumers and businesses, which is viewed as a positive for economic growth and corporate earnings. Furthermore, lower rates make investing in bonds less attractive, pushing capital to equities in order to achieve better returns. These trends could push stock prices higher.
This setup paves the way for a potential bull market, or at least a 20% rise, for the stock market in 2023. The S&P 500 is up 11% over the past three months and over 3% so far this year (as of this writing), which could signal that it is already starting its march higher. And this could present investors with an opportunity.
Image source: Getty Images.
Look at these stocks
Without a doubt, growth tech stocks were the hardest hit in 2022. Names like Roku and Spotify each saw their share prices plummet more than 65% last year. Even the strongest supporters of these businesses would question their investment merits after suffering such a huge portfolio hit.
In a rising market, growth stocks should perform quite nicely. But instead of eyeing unprofitable enterprises, no matter how appealing the revenue gains might be, it could be a worthwhile strategy to look at companies in this category that produce positive free cash flow (FCF).
A prime example that immediately comes to mind is Etsy NASDAQ: ETSY). Over the past five years, gross merchandise sales have gone from $766 million in the third quarter of 2017 to $3 billion in the third quarter of 2022 (ended Sept. 30). Margins and profitability have soared as the e-commerce marketplace achieved greater scale. According to management, there is a $466 billion addressable market for Etsy to penetrate, meaning tons of growth prospects.
Another fast-growing company that is financially sound is PayPal (PYPL 0.64%). The pioneer of digital payments rapidly increased its active user base throughout the depths of the pandemic, a figure that stands at 432 million today. It generated FCF of $1.8 billion in the latest quarter, a period when top-line growth slowed. As online shopping continues taking share of physical retail, PayPal is in a good position to benefit.
Neither Etsy nor PayPal have been immune to the slowdown in the economy, especially since their platforms lean toward discretionary purchases, which can be adversely affected in a downturn. But there's no question that they will be able to weather whatever comes their way, thanks to their strong balance sheets and cash-generating operations.
Adding these stocks to your portfolio ensures that you will gain should the broader market have a bounce-back year in 2023. Furthermore, their solid underlying fundamentals provide peace of mind.
