Todd Nesnick
The combination of rising inflation, tighter monetary policy, geopolitical tensions, and weakening economic activity were some of the main tailwinds for stocks this year. For sure, the 2022 stock bear market was predictable, with the factors supporting higher valuations in 2020 and 2021 no longer being relevant this year.
Fiscal and monetary stimulus dried up and as economic activity cooled off, investors and traders trimmed their upside exposure. However, since the last quarter of 2022 is unlikely to erase all the losses for the year, the attention shifts to what might happen in 2023. The picture is still rather mixed, with cross-current making it hard to predict whether a strong rebound is set to occur.
A challenging year for bulls
Information technology, consumer discretionary, and communication services are the sectors hardest hit by the selloff in stocks. This is a result of higher sensitivity to interest rates, as well as uncertainty over whether earnings can manage to outperform. The energy sector is the only one trading in the green, mainly because electricity, oil, natural gas, and coal have been in high demand, favoring companies operating in this field.
Although the market did not crash as it did in March 2020, the path lower was volatile, with multiple bear market rallies posing challenges for both buyers and sellers. In such an environment, traders prefer using CFDs with brokers like easyMarkets to take advantage of falling prices, yet if the market swings in both directions, it becomes difficult to optimize positioning.
Cheaper valuations enough to spur a rally?
In case 2022 ends up as negative for stocks, the question remains whether that’s enough to spur a rally next year. Historically speaking, years when stocks posted double-digit losses have been followed by a period of outperformance.
Stocks are popular financial instruments, accessible not just to financial institutions, but also to everyday traders. At the same time, via buy-backs and investments from pension funds, capital is constantly flowing into stocks, acting as a bid.
Despite all of these, one should not hurry to anticipate a rise in valuations, because fundamental factors might play a leading role here. A lot of questions have not been answered regarding inflation, monetary policy, and economic activity, so until there’s more clarity, stocks could go either way.
Factors the markets will be focused on
A peak in inflation is closer now and the market will monitor how fast or slow it will move back to the 2% target. The path lower should influence how stocks can recover. In case the global economy enters a recession, it would be important to see whether it’s a severe one, like 2008, or just a bump in the road.
Lastly, considering interest rates are no longer at 0% or negative, market participants are once again considering these fundamental factors such as cash flow, EPS, and revenue growth. Well-managed companies that have fixed costs and pricing power should perform well, as attractive valuations draw capital in.