It's the question every investor asks as a year comes to an end: “What will the market do next year?”
Many market watchers have been producing predictions over the last month, and we will share some of them. With this warning: don't take them too seriously.
Many Wall Streeters were expecting a good 2023 at best after stocks took a beating in 2022 thanks to the Federal Reserve's war on inflation. The Standard & Poor's 500 Index (^EN) – Get a free report fell 18.1% as the Federal Reserve was in the process of raising its key interest rate to 5.25% to 5.5%.
Business Insider wrote that most strategists were predicting a small drop in 2023.
A year later, the S&P 500 finished last week at nearly 4,755 points, up a bit for the week but a whopping 23.8% gain for the year, with four trading days left.
It is just 1.3% below its all-time intraday high of 4,818.62, recorded in early January 2022.
Related: These Sectors and stocks Dominated Wall Street Earnings in 2023
One money manager who has come close to that figure is Thomas Lee of Fundstrat Global Advisors. In mid-summer, amid much pessimism, he predicted a year-end S&P level of 4,750. That generated some ridicule, but the index was already up 16% for the year and then saw a big rally in late October.
Why the optimism? Because, as he said in numerous interviews at the time, inflation would go down. Oil prices could stop rising. The economy would be stable. And the Federal Reserve would stop raising interest rates.
Investors began to agree with Lee this fall. The Federal Reserve did the same. The central bank stopped raising rates in July. The 10-year bond hit 5% in October and retreated, allowing mortgage rates to fall.
Oil prices fell. So did gasoline prices. Nationally, they are down almost 20% since mid-September.
At its December meeting, the central bank finally said the fight against inflation was going well and that rate cuts were coming. (Maybe in March, but probably starting in June. The number of cuts and their size are not yet known.)
In addition to the S&P 500, the Nasdaq Composite Index (^COMPX) – Get a free report has increased by 43.3%. The Dow Jones Industrialists (^DJI) – Get a free report have risen 23.8% and the Nasdaq-100 index (^NDX) – Get a free report has increased by a surprising 53.4%.
Other indices joined the party in November and December, especially the small-cap Russell 2000, which is up 12.4% so far in December, compared to the S&P 500's 4.1% gain.
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Lee remains bullish, considering the S&P 500 will rise 9.3% in 2024. If you want a bigger bull, consider Ed Yardeni, a Wall Street regular. Yardeni predicts that the S&P 500 will reach 5,400 next year and possibly 6,000 in 2025. In short, new record territory.
But not everyone is optimistic. JPMorgan analysts see the S&P 500 falling 11.7% from current levels to 4,200, with reports that economic weakness is evolving into a recession. Morgan Stanley is not far behind. The index is estimated to end next year at 4,500, down 5.4%.
Hedge Fund Manager and Real Money Pro Columnist Doug Kass Guesses the S&P It never exceeds 4,900 but could fall to 4,100 due to rising oil prices, geopolitical crises and domestic political uncertainty.
The most bearish bear is BCA Research, a Montreal-based advisory firm. He sees oil prices possibly rising and the lagging effects of the Federal Reserve's rate hikes in 2022 and 2023 combining to produce a nasty recession. Result: a sharp drop in the S&P 500 to perhaps 3,300.
The great role of The Magnificent Seven
It seems everything is right. Not quite.
One reality of the 2023 bull market is that it has been dominated/distorted by gains in Magnificent Seven stocks: Alphabet (GOOGLE) – Get a free reportApple (AAPL) – Get a free reportAmazon.com (AMZN) – Get a free reportMetaplatforms (GOAL) – Get a free reportmicrosoft (MSFT) – Get a free reportNVIDIA (NVDA) – Get a free report and tesla (TSLA) – Get a free report.
The group has gained an average of 111.6% for the year, before dividends, dominated by chip giant Nvidia, with an increase of 234%, and Meta, with an increase of 193.7%, as of 22 December. The laggards, if you can call them that, are Apple, up “only” 49% and Microsoft, up 56.2%.
Excluding those gains, according to S&O Dow Jones analyst Howard Silverblatt in a Dec. 23 report, the S&P's total return of 25.8% (including dividends) would fall to 9.5%. Which is roughly the gain of the equally weighted S&P 500 index, which tracks each stock the same regardless of its size.
This is because the S&P 500 is a market cap-weighted index. The larger the market capitalization of a stock, the greater its influence on the index. The Magnificent Seven represent 28.2% of the total market capitalization of stocks in the index.
Five of the Mag 7s, as they are increasingly called, have market caps exceeding $1 trillion. (This occurs when the market capitalizations of Google's two classes of common stock are added together.)
Problems outside the market
While bearish or softer outlooks may be objected to, the common points they raise are important, including:
Oil prices. This is a wild card because of the war between Ukraine and Russia and the war between Israel and Hamas. In fact, crude oil rose for three days last week, pushing down retail gas prices. But the rally faded at the end of the week and sent prices higher.
Geopolitical concerns. What will happen between the war in Ukraine? And, perhaps, an equally dangerous question: Will China try to take over Taiwan militarily?
Economic weakening. There are increasing reports of poor holiday sales and companies and governments cutting jobs in the United States, as well as recession pressures in Europe and China.
The US elections are coming up. This appears to be a fight to the death and tensions will rise in November.
