Stocks closed in 2022 to the downside, suffering one of the worst annual losses since the global financial crisis in 2008. The S&P 500 Index (SPX) lost 19.4% for the year and fell more than 20% below its record high during the October 2022 downturn. Although Dow Jones Industrial Average (INDU) outperformed many of its peers, but also ended the year down 8.8%, and off more than 10% from its Jan 2022 all-time high during October. The technology-heavy Nasdaq Composite Index (COMPQ) and Nasdaq 100 Index (NDX) remain the laggards, plummeting more than 33% respectively last year.
We started the year on a down note as many indexes fell -0.03% to 0-0.76%, as concerns about rising rates, inflation, and recession fears continue to weigh on investors in the new year. As long as the Federal Reserve remains hawkish, continuing its rate hikes to contain rising inflation, stocks and financial assets will remain volatile.
Last year, investors favored the value and defensive, lower volatility, dividend-yielding names over growth-oriented companies. Will this repeat in the new year as the lack of clarity from the central bank and geopolitical and macroeconomic uncertainties lead to a more unsettled and turbulent market scenario?
History shows the U.S. stock market tends to retain its longer-term upward-biased trend, rebounding after a significant market downturn. The S&P 500 Index has often rallied an average of double digits (+10%) in the year following a sharp and dramatic market decline.
If a brief or mild recession develops, the stock market may have already discounted the economic downturn and will begin to normalize and mean revert. However, if this is a deep or prolonged recession, it could lead to another challenging market environment in 2023.
Are we in the late innings of the cyclical bear market?
Or are we entering the next structural bear/trading range market?
One scenario and the preferred one is the 10/13/22 low at 3,491.58 turns out to be a pivotal bottom, and 2023 is a transition period toward the resumption of the May 2013 structural/secular bull trend.
Although there may be further selling toward the bottom of its 2008/2009 uptrend channel at 3,551 and possibly to the Jul 2020 V-pattern breakout (3,231), the 2022 sell-off remains a cyclical bear decline. Under this market scenario, SPX can retest the Jan 2022 all-time high (4,818.62) and above this rally toward 5,415 to test the top of its 2008/2009 uptrend channel. See the enclosed monthly line chart for further information.
Another scenario, and the most unsettling of the two, is the possibility the May 2013 structural bull has ended, and SPX is transitioning toward a multi-year range-bound market via cyclical bull rallies and cyclical bear declines, sustaining for eight to twenty years.
We will look back upon this period and wonder why markets went nowhere for so long. The market scenario is akin to the nifty-fifty blowup leading to the 1966-1982 secular bear/trading range or the culmination of the Tech/telecom dot.com bubble and global financial crisis/great recession resulting in the 2000-2013 secular bear/trading range market.
If the latter of the two scenarios develops, investing in a range-bound market may mean investors must be more tactical and selective, focusing on the importance of dividends as a crucial component of total returns.