What to expect for the stock market in 2023 after the biggest decline since the financial crisis

On December 25, 2022, 9:59 AM

Investors have had a rough 2022 — the worst year since the financial crisis in 2008. There’s been a perfect storm of falling stock and bond prices as the Federal Reserve has raised interest rates to bring down inflation. But is the worst over?

Oaktree Capital Management’s Howard Marks argues that the new interest-rate environment means four decades of assumptions about the markets need to be tossed aside.

Isabel Wang looks back at the S&P 500’s SPX, +0.59% performance since 1928. The benchmark index typically rises during a year following a 10% decline. However, things can turn out differently following the type of action we have seen this year — a decline of nearly 20%.

The Fed makes progress as inflation cools

On Friday, the PCE Index (personal consumption expenditures) for November showed an increase of only 0.1%, for a 5.5% year-over-year inflation rate. The PCE has slowed for five straight months. This index is favored by Federal Reserve policymakers because it strips out food and energy expenses.

In another sign of an economic slowdown, personal incomes rose 0.4% in November, less than 0.7% in October. One concern for investors who worry about continuing increases in interest rates by the Fed is that the November pace for income growth exceeded the rate of inflation.

Another area showing evidence of an economic slowdown is purchases of manufactured goods. Orders for durable goods were down 2.1% in November, more than the 1.1% decline forecasted by economists polled by the Wall Street Journal. Other numbers pointed to slowing spending by businesses.

The end of the FAANG era

Most exchange traded funds follow indexes. The SPDR S&P 500 ETF Trust SPY, +0.58% was heavily concentrated in the FAANG stocks at the end of 2021.

The FAANG group is Meta Platforms (the renamed Facebook) META, +0.79%, Apple AAPL, -0.28%, Amazon.com AMZN, +1.74%, Netflix NFLX, -0.94% and Google holding company Alphabet GOOGL, +1.68% GOOG, +1.76%. (SPY is the first and largest ETF with $357 billion in assets under management. It tracks the benchmark S&P 500, which is weighted by market capitalization.)

Here’s how SPY and the FAANG group have performed this year, with any dividends reinvested:

The FAANGs have fared worse than SPY, with Meta, Amazon and Netflix plunging 50% or more.

In this week’s ETF Wrap, Christine Idzelis explains what the end of FAANG dominance means for indexing strategies, while covering other industry news.

Stock picks for 2023 — from China to dividend names

Michael Brush looks to China for 13 consumer and internet stocks to own as the country’s economy reopens.

Beth Pinsker reports on the Greenlight platform, which lets children make investment and trading decisions along with their parents. Here are the investments favored by young people — you may be surprised.

How stock market forecasts for 2022 worked out

Heading into 2022, it was obvious the Federal Reserve would need to raise interest rates and stop buying bonds because inflation had already spiked.

So how good were Wall Street’s predictions for the stock market? Joseph Adinolfi reports on the accuracy of dozens of market forecasts.

And in case you are wondering:

Story By Marketwatch.com