By: Zachary Bouck, CFP®
In 2022, I made four economic and investment predictions for the 12 months to follow:
Prediction #1: Big The Keeps Getting Bigger
Prediction #2: USA!!
Prediction #3: On the Path to Higher Yields
Prediction #4: Undervalued Companies (Value Will Outperform)
All four of my predictions were accurate; however, though the theme was correct, the degree to which these themes played out was remarkable!
1. Big Tech Keeps Getting Bigger: Big tech share prices collapsed, but the sector’s market share skyrocketed in 2022.
2. USA!!: Europe devolved into war, and China maintained a multi-year shutdown, but the United States remained pretty stable. Stocks performed respectively.
3. On the Path to Higher Yields: The Fed raised interest rates seven times last year—the fastest rate hike in history.
4. Undervalued Companies: Value outperformed growth tremendously, and it’s remarkably still relatively inexpensive in comparison.
WHAT WILL HAPPEN IN 2023?
Predictions are rarely accurate, so why make them at all?
The utility of making a prediction is that it forces you to explore every idea and piece of information spinning around in your head. You can put pen to paper and refine your idea to debate those with a different perspective.
The problem for predictors is we base our predictions on the current reality, not the infinite number of potential futures available. It makes sense. If a lion is stalking your territory, who would bother to predict that an asteroid may hit your village? We make predictions based on the data that is right in front of us. I’ve made a conscious effort to try and zoom out from our current economic environment, and identify strong trends, regardless of the daily news around inflation, interest rates, and political events.
Prediction #1: Healthcare Outperforms The S&P 500
(I am making this prediction on 1/26/23 when I'm already underwater by about 7%!)
Whether we have a recession in 2023 or not remains to be seen. Regardless of the economic environment, healthcare is a non-discretionary need with reliable growth factors, perhaps most notably population growth. If we do face a recession, healthcare companies will continue to generate revenue.
The risk to this prediction is that inflation drops quickly, the fed drops rates, and money rushes back into ‘risk sectors’ of the market. As long as inflation doesn’t compress the margins of healthcare companies, I expect this to be a top-performing sector in 2023.
Prediction #2 – Biotech Outperforms The S&P 500
The biotech revolution is here, and the stock market has yet to notice. In an era of high-paying bonds, pre-profit, pre-revenue companies are just not on the top of most investors ‘to-buy’ lists.
Despite the market’s indifference, Biotech companies are trading at historic lows while simultaneously making historical innovations.
A risk in biotech is the extreme volatility. In average years, this sector is wild. In volatile years the fluctuations can be downright nauseating.
Prediction #3 – Inflation Comes Down Significantly
If I was recklessly courageous, I would attach a number to this prediction, but the trend is more important than the number. With all eyes on this headline number coming down, it’s easy to lose sight of the incredible amount of behind-the-scenes action to weaken inflation. The more relevant items on the list include an increased fed funds rate, quantitative tightening, a significant reduction in the M2 money supply, and an already slowing economy.
I’m not going out on a limb with this prediction—the wheels are already set in motion.
Prediction #4 – Small Cap Will Do Well Over Five Years
The #1 indicator of returns over a five-year periods is earnings valuation, and small-cap is a rare piece of today’s market that is significantly on sale. The price-to-earnings of the small-cap growth sector is trading at 77% of its historic average of 35.5.
If inflation falls as predicted, it will ease pressure on the Fed and inspire investors to generate return. The small-cap growth sector appears primed for outperformance in that scenario. Thus, prediction #4 addresses growing your assets in this sector throughout 2023 to try and take advantage of what may be a long-term trend.
Final Thoughts
As I pat myself on the back for my accurate 2022 predictions, I don’t foresee any four of these 2023 scenarios as ‘highly probable.’
In fact, the first three would be ‘turn-arounds,’ betting on a course change that is far from guaranteed. But as we discussed in our podcasts, opportunity is often found by peering through a different perspective—in my 2023 predictions, I have done just that.
Disclosures: Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Denver Wealth Management, Inc., a registered investment advisor. Denver Wealth Management, Inc. is a separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing includes risk including the possible loss of principal. No strategy assures success or protects against loss. All information is believed to be from reliable sources; however, Denver Wealth Management, Inc. and LPL Financial make no representation to its completeness or accuracy. Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, time frame and risk tolerance. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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