Financial Planning

Has the Stock Market Hit Bottom? And the 2023 Economy

5 min
Jon Green
December 8, 2022

Many investors are asking: has the stock market hit bottom? But the answer isn’t so simple. Here is what we know going into the 2023 economy.

So many investors as asking whether or not the stock market has hit bottom. But when we look at the financial market comprehensively, we have to consider more than stocks.

Investing in 2023 will likely be much different than in previous years. The economy has fundamentally changed to reflect this new world that we live in. And until inflationary pressures are under control, we’re likely to see a market driven by interest rates and pessimistic sentiment. 

Understanding how the current monetary policy functions is critical to understanding the market. 

But before we talk about the economy and investing over the year, let’s take a closer look at the stock market. Is it bottoming out? Or can it fall further? 

Has the Stock Market Hit Bottom?

After over a decade of stock market highs, many individual investors are wondering whether or not the market has finally bottomed out. Stocks are down 18% this year. Thus, 2022 could be the worst-performing year since the 2008 Financial Crisis—at least so far.

Normally, we see a brief bear rally just before stocks take another nose dive. And with each momentary increase, news outlets are eager to report that it could be a sign that we’re about to bottom out. And this is exactly what happened on Friday, December 5th

These “false rallies” make it difficult to determine the actual state of the market.

To make matters more complicated, the stock market isn’t based on pure math or logic. It runs solely on emotion. This explains the dramatic highs of the market over the past decade, with soaring stock prices and company valuations even if the company’s value hasn’t kept pace. 

Generally, it’s likely too early to tell whether or not the stock market has hit bottom. With the Fed still seeking to tamper inflation rates and pessimistic investor sentiment, coupled with layoffs and a potential recession, it’s possible that the market could drop further. 

In any case, it’s unlikely we will see another bull market soon. The current bear market is here to stay, at least for a while longer, with added volatility due to the market uncertainty. 

That said, the stock market is only one aspect of the financial markets. For a full picture, we need to look at the progress of asset classes as a whole. 

Economic Snapshot: Asset Classes

The value of all assets ebb and flow. The Callan Periodic Table of Investment Returns provides a snapshot of this process on a monthly and annual basis. In this table, asset classes are ranked from best to worst, with the best-performing class at the top of the chart. 

There are nine assets covered:

Ideally, the goal is to buy assets when they are at the bottom of the chart, and sell when they are high. For example, you can note how the Emerging Markets class started out low on the chart in 2021, but gradually climbed to the top, where it peaked in August 2021 before falling to the bottom again.  

A screen capture of the Callan Periodic Table of Investment Returns

But more than determining when it may be time to rebalance your portfolio, this birds-eye view of assets offers a picture of the overall economy.

As we progressed through 2022, more and more asset classes turned negative. And when we look at the YTD metrics, every asset class is down by at least 12%.

This suggests that the markets could be bottoming out. But it could also be just as likely that asset classes will be tempered until the interest rates drop. 

Pressures on the 2023 Economy

Let’s face it: It’s been a rough few years. The pandemic spurred several new and unnatural pressures on the economy, including lockdowns, price gauging, a skyrocketing housing market, lower consumer spending, and supply chain shortages. Further disruptions to international trade due to geopolitical conflicts and regional lockdowns stress-tested the markets further.

But that’s not all. 

The rapid rise of inflation, prompted by both opportunists looking to raise prices and legitimate shortages, had experts recommending that businesses purchase excess inventory early in the year. This was to offset potential delays and inflationary costs. However, businesses are now struggling to sell excess inventory as consumers curb spending. 

Behind the scenes, private equity has been buying up residential housing, hospices, and private practices. Healthcare management organizations (HMOs) continue to acquire non-profits and smaller competitors, thus increasing the cost of healthcare. 

In 2023, it’s possible we’ll see the consequences of a squeezed market. High inflation, coupled with stark increases in living costs, will likely result in less consumer spending. Businesses could cut back, too, as credit becomes expensive and difficult to obtain. 

However, it’s difficult to forecast how far the downturn will go. 

Unlike other recessions and economic slowdowns, the recent tech layoffs are not yet spiking high unemployment. Pandemic-related deaths and chronic illnesses, as well as a flush of retirees, has left significant job openings, albeit often at lower-paying positions. 

Given the fact that inflation is not yet firmly under control, the Federal Reserve will continue to raise interest rates. Barring an extraordinary event, such as cutting taxes, this tampered momentum will likely dominate the 2023 economy.

As always, I recommend that clients have an emergency fund with liquid assets that last 6-12 months. You may never need to dip into that reserve, but it’s never a bad idea to have a cash reserve. 

That said, with the interest rate hike, fixed-income assets could be worth investing in, depending on your portfolio and goals. 

Before purchasing any new investment, make sure to review your options with a trusted advisor.

3 More Common Questions about Investing in 2023

There are a few more questions I’ve noticed from clients regarding investing over the next year. 

How Can You Tell When Inflation Is on Its Way Down?

It can be difficult to tell when inflation is on its way down only because it’s questionable as to what’s causing inflation. In my opinion, the current rate has ballooned due to price gauging. 

The easiest place to go to review inflation rates is the Consumer Price Index (CPI). It comes out once a month, and the summary can often give you a snapshot. When the CPI begins to drop, so will prices. 

What Could Cause Stocks and Bonds to Fall Together?

There are two potential reasons that the value of stocks and bonds could fall together: 

  1. An overall panic. For example, if Russia declared war on the United States, everything would fall. Basically, a wildcard event that could cause a panic would result in a drop for both bonds and stocks together. 
  2. Rising interest rates. Affect equity markets and the bond market, so each time the interest rates increase, the dollar value for current stocks and bonds can drop. 

At an individual business level, a company filing bankruptcy would affect its bond and stock value. It wouldn’t cause the whole market to collapse, but investors would see a dip in their portfolios. 

What Are the Critical Factors at Play That Could Impact the Timing of a Stock Market Recovery?

The factors that affect a recovery would depend on the specific situation. 

Currently, the biggest obstacle to stock market recovery is the increasing interest rate. However, the Fed will stop raising interest rates when they get inflation under control. It wouldn’t help if they stopped raising interest rates and continued inflation. 

Other factors that could lead to recovery are significant events. Things like the government cutting corporate taxes. Otherwise, if the GDP or consumer spending increased, that could also reduce stock market volatility. The problem here is that even if the Fed reduced the higher interest rates and inflation sprung up again, consumers would continue to spend less, and the GDP would come to a standstill. 

You could say that, at least for the moment, we’re between a rock and a hard place. The quickest way out could be through—which means stomaching higher interest rates until inflation cools off. 

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