Why Stocks Will Rebound in 2023

It would be a gross understatement to say 2022 was a tough year for the stock market. The bears won, and by a wide margin. Be it stocks, bonds, cryptocurrencies, in 2022 there were no places to hide. This was compounded by consumers feeling the effects of high inflation as recession concerns grew. The Dow Jones Industrial Average ended 2022 at $33,147.25, losing 10% for the year. The S&P 500 index lost 18% to end at 3,839.50, while the tech-heavy Nasdaq Composite Index suffered the worst of the declines, losing 34% to end the year at 10,466.48.

This level of devastation caused havoc in many portfolios. Even then, investors are still feeling somewhat optimistic heading into 2023. Much of the optimism stems from historical data that suggests stocks tend to rebound strongly from the bear market lows. There’s also some wishful thinking that the Federal Reserve at some point in 2023 will pivot from its hawkish stance regarding interest rates.

However, one of the main reasons to be bullish heading into 2023 is the fact that there’s really no place for the market to go but up. Granted, this is a contrarian view which might appear as oversimplifying something that has many structural components, which can all be affected. But think about it this way: the bears won in 2022. Heading into 2023, the sentiment among individual investors suggests that the bears were at 47.6% versus 26.5% for the bulls.

This 21 percentage point difference between sentiments suggests more investors may eventually become more bullish, which not only can spark a rally but also sustain it. Another reason I expect stocks to rebound in 2023 will the Fed's actions. The effect of Federal Reserve's monetary tightening to fight inflation was a key disrupter in moving markets in 2022. Fed Chairman Jerome Powell in August spoke bluntly about policy decisions to combat inflation during his speech at Jackson Hole:

“Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” This was precisely what unfolded. With inflation at multi-decade highs, the Fed did what it could to adhere to its mandates, raising interest rates seven times, including raising rates by 75-basis points four consecutive times.

The Fed had not been this aggressive with its policy decisions in four decades. All told, rates will end 2022 at their highest level since 2007. In the process, stocks got punished due to lack of liquidity. I believe as some point, the Fed pivot will come. Consider that the benchmark rate is currently at around 4.5%. This suggests that the Fed now has limited wiggle room to remain aggressive. It’s also notable that the last increase in December was by 50 basis points, not the 75 basis points it had enacted in the four previous meetings leading up to the last decision.

What’s more, there is now a better than 70% probability that the Fed’s next hike during its meeting on February 1 will be 25 basis points. Assuming these metrics come to fruition, it will signal a that inflation is being tamed and the long-awaited pivot has arrived. As such, prominent tech stocks like Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and Google parent Alphabet (GOOG , GOOGL) which have been ravaged by high interest rates, will rebound from the bear market lows. Smart investors should be buying now ahead of the rebound.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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