Wall Street had a shaky start to 2023 after the S&P 500’s worst year since 2008. As inflation continued to ride northward, the Federal Reserve increased interest rates seven times throughout the year, sending stocks and bonds both into a tailspin. Tech shares were in even worse shape. No wonder investors are looking for ETF investment ideas for 2023. For them, we have jotted down a few predictions.
Inflation Will Cool Down But Will Likely Remain Stubborn
After hitting multi-year highs, inflation rates started showing signs of cooling down from late 2022. The personal consumption expenditure price index in the United States increased 5.5% year on year in November 2022, the least since October 2021 and below 6.1% in October. But the rates are far higher than the Fed’s target of 2.0%.
We do not expect inflation to slip to the 2.0% range in 2023. iShares 05 Year TIPS Bond ETF STIP can thus be watched for gains as long as inflation remains stubborn. The fund STIP yields 6.04% annually and charges 3 bps in fees. The fund has lost 2.9% in the past year (as of Dec 30, 2022).
Recessionary Fears Seem Exaggerated
While the bond market predicts a recession, as indicated by the flattening of the yield curve, the U.S. GDP growth rate seems decent. The U.S. economy grew an annualized 3.2% sequentially in Q3 of 2022, better than 2.9% in the second estimate, and rebounding from two successive quarters of contraction.
Consumer spending increased more than anticipated (2.3% versus 1.7% in the second estimate), as growth in health care and "other" services was prominent. Thus, investors can bet on ETFs like SPDR S&P Biotech ETF XBI and Health Care Select Sector SPDR ETF XLV. This is especially true, given that FDA approvals are on the rise. This will result in more revenue generation for the biotech firms.
Corporate Earnings to Remain Steady
The Q3 earnings reports revealed that contrary to fears of a looming earnings cliff, companies have largely been able to protect their bottom lines. Actual Q3 results came in better than expected. Per Zacks Earnings Trends issued on Nov 30, 2022, earnings growth is expected to be 2.8% in 2023 over 2.3% increase in revenues.
WisdomTree U.S. LargeCap ETF EPS should thus be in focus. It is a fundamentally weighted index that measures the performance of earnings-generating companies within the large-capitalization segment of the U.S. stock market. The fund has advanced 8.9% in the past three months (as of Dec 30, 2022).
Gold to Regain Some Strength
Gold prices jumped to a six-month high and analysts expect records in 2023, per a CNBC article. The reason behind this is the likely decline in the greenback prices. As the Fed will slower the rate hike momentum, the U.S. dollar will lose strength and favor the non-yielding gold prices. Moreover, after a downbeat 2022, gold’s valuation is a little lower currently. This will offer the yellow metal a leeway to gain strength. Plus, the global growth slowdown should benefit the safe-haven asset, gold. SPDR Gold Shares GLD should thus be watched for gains.
Value Stocks Continue to Pull the Strings
As rates hover around solid levels, value stocks will likely prevail in 2023. High-flying growth companies often focus on increasing future revenues and reinvesting their earnings into product research and expansion. Hence, they often fail to focus on shareholder value maximization. Moreover, these companies often rely more on loans and are thus more susceptible than value stocks to rising rates. SPDR Portfolio S&P 500 Value ETF SPYV, which has lost just 7.8% in the past year, should be closely watched in 2023.
Europe Likely to Outperform the United States
Vanguard FTSE Europe ETF VGK hasgained about 17.5% in the past three months against a 4.4% increment in the S&P 500. U.K. ETF, EWU, too added 14.1% in the past three months. We expect this winning momentum in Europe and Eurozone ETFs to continue in 2023 as several Europe ETFs outperformed the S&P 500 in 2022 as well.
The ECB raised interest rates by 50 bps to 2.5% during its last monetary policy meeting of 2022, marking a fourth-rate increase, following two consecutive 75 bps hikes. But at 2.5%, the Eurozone's current rate is still significantly lower than in the United States or the United Kingdom, which are at 4.5% and 3.5%, respectively. Against this backdrop, a slowdown in ECB rate hikes should favor Eurozone stocks.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.