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My Gut Feeling For 2023 – A Look Back

My Gut Feeling For 2023 – A Look Back

January 02, 2024

As 2023 began, I published My Gut Feeling For 2023. Now that 2023 is in the books, I wanted to look back at how my expectations and predictions fared in 2023. Recall these predictions were made in the spirit of the old Wall Street Week with Louis Rukeyser show in that they were fixed a year ago and could not change. Of course, while I could not alter my predictions, I did actively modify, when necessary, the components and weighting with our portfolios.

There were three types of analysts / investors in 2023.  First, we had those who doubled down from 2022 by believing that 2023 would be a repeat of the prior year. That did not occur; and they were tagged as broken clocks. Then there were the fraidy cats, those that did not listen to stock market history and decided to get conservative for 2023. They were rewarded but to a lesser extent and should not be ridiculed. Finally, there was the class of people who had the intestinal fortitude to remain headstrong, forecasting a rebound just like that which occurred after large selloffs in 2008-09 and early 2020. They benefitted the most in 2023. The trick was to bet against the Fed expecting the end of its two-year long tightening cycle and catching onto the rise of AI’s (Artificial Intelligence) importance to the economy.

Here follows The Finance Professor’s self-grading of his (my) predictions for 2023. The original commentary is in lighter print and then in bold, green italics are the comparison to actual results and explanation, as warranted.:

  1. As is commonplace, Wall Street analysts follow the crowd and the trend, projecting another bad year in 2023. I am going to put forward a somewhat contrarian view to the crowd. Yes, I do believe that the beginning of 2023 could be challenging as the FOMC continues its zealous interest rate tightening and assault on the economy. However, I do believe that when the dust settles, at the end of 2023, the SPX will be higher on the year. The SPX ended 2022 at 3,839.50, which using Standard & Poor’s 500 (SPX) consensus earnings estimates of about 219.49 implies an index price/earnings multiple (PE) of 17.49. From an historical basis, since the financial crisis, the SPX PE ratio ranged from a low of 12.86 in 2011 to a high of 26.88 in 2020 with an average of 18.08. So, we can conclude that the valuation of the SPX at the end of 2022 was reasonable. Interestingly enough, the US Treasury yield of about 3.65% equates to an equivalent “PE” of 27.4 still implies that stocks remain cheaper than bonds. Recall that bonds also had a horrible 2022. Parenthetically, in a year with two negative quarter of GDP (Gross Domestic Product) SPX revenues are estimated to have grown by about 11% and earnings by about 5%. Let’s look ahead to 2023. Wall Street consensus estimates for 2023 SPX earnings is about 229. Applying an average PE ratio of 18 arrives at a target price of 4,122 for the SPX, an annual increase of 7.36%, which is just below the long-term average increase for the index. Now I must throw into the equation some historical data. The SPX lost 19.44% in 2022. In 1974 (a midterm election year) the SPX lost 29.72% and gained 31.55% in 1975. In 2002, (another midterm election year) the SPX lost 23.37% and gained 26.38% in 2003. Finally, in 2008 the SPX lost 38.49% and gained 23.45% in 2009. So, I could make an argument for a reflexive rebound off the 2022 declines such that the SPX gains 20% or more in 2023. Markets do not move in straight lines, and I think that 2023 will have a continuation of the Fed induced weakness in early 2023. The latter half of 2023 will be much stronger. When I throw all of the above into a blender, let’s expect the SPX to trade as low as 3,600 and as high as 4,740 and close the year at 4,350, a gain of 13.3% with an implicit 19 PE.
    The SPX closed 2023 at 4,769.83, right near the year’s high of 4,793.26 and within short distance of the intra-day all-time high of 4,808.72 set on January 4, 2022. We did get that reflexive bounce that I spoke of. This year’s low of 3,795.21 was set on 2023’s first trading day of the year.

[Chart of SPX for 2023. Source: Telemet]

  1. The Federal Reserve Open Market Committee (FOMC) had its foot on the breaks in an attempt to quell inflation. The FOMC raised its target Fed Funds Rate by 25bps in March, 50 bps in May, 75 bps in June July September and November and finally 50 basis points in December. In December, the FOMC signaled that while it would continue to raise rates to fight inflation, it would do so at lesser increments. I expect two more 50 bp increases and two more 25 bps tightening before putting a halt to its attack on interest rates. The fourth meeting in 2023 would take place June 15 and 16.
    The FOMC which remained stubborn for most of the year, increased its Fed Funds target rate by 25 bps in February, March, May and July for a total of an increase of 1%. Feeling pressure from the markets and some inflationary relief allowed the FOMC to be less restrictive that I expected. Still 1% increase in rate had a deleterious effect on the fixed income markets for the first three quarters of 2023.

  2. As for US Treasury securities and bonds in general, the mantra of staying short will still be the case. The short end of the curve, i.e. 2 years and shorter will approach 6% until the Fed begins to pause. The longer end of the curve will peak at around 5%, resulting in a continued inversion of the curve and belief that we are in a recession. – The 2-Year US Treasurypeaked at around 5.5% in October. For most of the year, that security traded at yields from 5.25% to 5.50%. By the end of 2023, when the FOMC was signaling an end to its tightening cycle, the 2-year slid down to 4.53%. Similarly, the 30-year US Treasury peaked at around 5.1% in October and then fell to just about 4% by the end of 2023. Yes, the yield curve remains inverted but No there was no recession, although analysts are still looking for that needle in a haystack.

  3. Recession or no recession, that is the question? Many economists are expecting a recession in the latter part of 2023. I learned a long time ago, in college, from a future Nobel Prize winner, that economists are good at explaining the past but horrible at predicting the future. There were two negative quarters of Real GDP (inflation adjusted) in 2022, followed by an increase of 3.2% in 3q22 as reported by the Bureau of Economic Analysis. As inflation subsides, as I expect it should, the economy will perform better. Mastercard (MA) reported that holiday sales – despite the winter storms – increased 7.6%. As I have written before, regional recessions on a rolling basis occurred in 2022, and might also do so in 2023, but a nationwide recession is not going to occur in 2023. Finally, it is a mistake to assume that Fed tightening cycles end in recessions. UBS had a good article on this phenomenon earlier in 2022.
    My thesis of rolling regional and sector recessions seemed to have been the case and in the aggregate the US Economy did not experience a traditional recession.

  4. Growth stocks will not have a repeat of the poor showing in 2022 with the caveat that growth will come from stocks other than “FANG” stocks – Meta (the former Facebook) (META), Amazon (AMZN), Netflix (NFLX) and Alphabet (the former Google) (GOOGL / GOOG), whose business models have peaked or as in the case of META and NFLX are fading fast. Growth will come from a new class of stocks and industries. I expect the beaten down software, semiconductor, data and security stocks to spring to life in 2023. All that being said, you must look at Growth stocks within the context that I expect a poor start to the year with a better rest of the year.
    It was a banner year for growth stock as the NASDAQ 100 surged 53.8%. Some of the aforementioned “FANG” stocks did well, but the clear winners were growth stocks associated with Artificial Intelligence, cybersecurity, semiconductors and diabetes / obesity management such as Nvidia (NVDA), Tesla (TSLA), Cloudflare (NET), Palo Alto Networks (PANW), Broadcom (AVGO) and Eli Lilly (LLY); all of which I might add we own and will continue to hold. Our performance (which was spectacular in our Growth Portfolio in 2023) is available on request.

  5. Dividend / Value stocks had a strong 2021 and mildly negative 2022. I expect that they will return to historical form and post reasonably positive gains of 6 – 10% on a total return basis if interest rates behave as I expect – some end of the tightening cycle and a signal that rates will begin to reverse downward in 2024.
    Value investing was shunned in 2023 as investors flocked to the shinier Growth stocks (mentioned above). The FOMC uneasiness reflected in this sector’s returns. Despite that, we turned in double digit returns in this segment for which we can provide on request.

  6. When you look at a list of the top performing companies in the SPX for 2022, the top 10 were all Energy stocks. Of the top 20 performing companies in the SPX, fifteen were Energy, four were Health Care and one was a material stock. Energy was our best performing portfolio in 2022. It can still be a positive performer in 2023 but we will be selective when choosing an energy company into which invest as I can guaranty that that the Energy sector will not produce fifteen of the top twenty performing stocks in 2023. Healthcare does look interesting and fits into both the Growth and Dividend categories, depending on the individual stocks.
    Those aforementioned technology / growth stocks were the darlings of 2023. Energy and Real Estate were laggards while consumer discretionary stocks did well, but that was up to stock pickers acumen. For example, Lululemon Athletics (LULU) was an excellent performer in 2023 but Walt Disney (DIS) is to be avoided.

  7. Consumers will continue to spend on discretionary goods and services despite higher prices as their balance sheets are quite solid. Housing will continue its rebound that began in the last few weeks of 2022 as mortgage rates dropped by around 1%. I already see that occurring in the Las Vegas area. Even if the FOMC raises rates as I expect in 2023, the 30-yr mortgage rate will rise by 1% to 7.5%, exactly where it was a few weeks ago. A note to new or future homebuyers. Expect 30-yr mortgage rates to be in the 5.5% to 7.5% in the future and by that, I mean the next decade or two. Do not expect rates to drop back down to levels of the last generation. Those rates of 4% and lower were anomalies. The average historical 30-yr mortgage rate was about 7.50%. Plan accordingly.
    I guessed well on this forecast. 30-year mortgage rates peaked in October at 7.75% andthen came tumbling down to around 6.61% at the end of the year. Be patient as it will go lower but be forewarned that the heyday of cheap mortgages are over. If you haven’t yet read it, check out Carly’s My Two Cents on the topic.

  8. In Politics I have a few expectations / surprises (this section is always meant to be speculative and controversial, so if you don’t like it, get a sense of humor):
  • There will be a resolution to the war in Ukraine. The weak link in the fence will be Vladmir Putin. Its likely that he will pass away from the cancer he is afflicted with. As far I am concerned, it should be long and painful. Either he makes a deal before he dies, or one will be made for him. – While the war continued, it took a back seat to the unexpected October 7 aggression by Hamas in Israel
  • Elon Musk has already set the table for all sorts of investigations. If you don’t already know him, Matt Taibbi, (son of NBC-NY reporter Mike Taibbi) is going to become synonymous with Woodward and Bernstein as his Twitter Files Series become the basis for investigations on Capitol Hill. Jack Dorsey, former CEO of Twitter urged Musk to release all of Twitter’s internal documents, probably to shield himself for having lied to Congress.- Twitter, now renamed “X” unleashed much documentation which shed a negative light on the conspiracy between Big Tech and Federal Department of Justice and FBI.
  • Beyond the Twitter related investigation, expect some impeachment revenge by the new House of Representatives. Amongst those targeted are Sec. Alejandro Mayorkas, Attorney General Merrick Garland and Sec. Pete Buttigieg. Buttigieg after being acquitted in the Senate will announce his intention to run for President in 2024.- Congress has decided to skip over Garland, Buttigieg and Mayorkas and has the Biden Crime Family squarely in its sights.
  • I think that Pres. Biden won’t be impeached because he will announce his intention not to run for reelection or withdraw from the race once his son and brother are implicated in crimes. - This is still a work in progress as a formal impeachment investigation has begun but President Biden is not withdrawing from the presidential race.His final card has yet to be played (and I will talk more about this in 2024 prognostications)
  • Legislation will be put forth to reverse some of the spending that was approved in the last Congress. – This has defiantly occurred under the new house leadership.
  • A famous politician will be caught in flagrante delicto. However, this time it will be a woman politician. – A little brazen in my expectations but it was hard to beat the double–headed antics of Robert Menendez and George Santos.
  • Pope Francis will pass away peacefully in his sleep and an African will be named the next pope.- I whiffed on this one.
  1. How about some sports talk? Or put another way, more speculation and controversy. Major League Baseball will announce intentions to expand to 32 teams (for the first time since 1998) and realign into eight divisions, two in each league. If the Oakland As manage to stay put (rather than move to Las Vegas) expect one of those expansion teams to land in Las Vegas with a population of approximately 2.4 million in Clark County. The next logical location for expansion would be San Antonio, the 12th most populous city in the United States, with about 1.5 million residents. Tom Brady signs with the Las Vegas Raiders. The Brooklyn Nets win the NBA title. Boston and Vegas square off for the Stanley Cup (Brian: get me a ticket and I will be there). New York could be in store for another Subway Series. Arizona wins the NCAA Men’s D1 Final 4.
    The Vegas Golden Knights won the 2023 Stanley Cup Championship beating the Florida Panthers. The Oakland A’s are moving to Las Vegas after all. MLB will consider expanding to 32 teams in a few years. UConn won the NCAA Men’s Basketball tournament again. The Denver Nuggets won their first NBA crown. Tom Brady did not win another Super Bowl but retired for the final (?) time.

Best wishes for a Happy and Healthy 2024. As always, please contact me if I can help you with your investment needs or for media appearances. Also, feel free to post your comments / questions to My Gut Feeling and pass it on to relatives, friends, and colleagues throughout the year. Also don’t forget to read the newly launched Carly Rothbort’s My Two Cents.

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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC was long AMZN, AVGO, LLY, LULU, NET, NVDA, PANW, SPY, SSO, SPXL, SOXL, TSLA, QQQ, QLD & TQQQ - although positions can change at any time.

Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high net worth private wealth management. LVAM is affiliated with Kingswood Wealth Advisors Services, a registered investment advisor.

For more information on investing with LakeView Asset Management, LLC call us at 702-749-9343 or request more information by clicking on the contact button on the top right-hand corner of the website or by emailing Scott at srothbort-lakeview@kingswoodus.com or Carly at crothbort-lakeview@kingswoodus.com. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ

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