We may not be seeing a Santa Claus Rally before the end of 2022, and perhaps we should not be so quick to write off a 2023 gift from Mr. Grinch.
However, depending on an investor’s investment timeline, the ebb and flow of the market as we enter 2023 may be creating perfect buying opportunities!
Macroeconomic Situation as 2022 Ebbs
Before we go any further, let’s paint our economic backdrop to ensure we are on the same page.
As of our latest Consumer Price Index (CPI) report, inflation was recorded at 7.1%, which is a sign depicting improvement from previously readings. However, inflation is still painfully sky-high.
Therefore, we must consider recent deflation readings merely as battles won while the war continues. That should direct our focus to the Federal Reserve.
The Federal Reserve must maintain a consistent strategy in their fight against inflation. Ultimately, this means we must take Jerome Powell’s words at face value, to prepare for a Federal Reserve that will likely continue to raise interest rates at least for the first half of 2023. It has been mentioned that the terminal rate will have to reach 5-5.1%. The rate currently sits at 4.92%.
How can the Federal Reserve remain steadfast in raising rates?
The unemployment rate is hovering around 3.7% and the United States rarely enjoys such a robust labor market that grants the Federal Reserve the ‘all clear, go ahead’ sign to continue raising rates. Low unemployment drives wage inflation higher, meaning low unemployment indirectly exacerbates our current economic conditions.
How Stocks React to Inflation
Now, as investors, the questions we must be asking are, “How do these market mandates impact companies? And moreover, our investments?” Lastly, “Why should we consider these market mandates a gift?”
Well, the outcome of a high-interest-rate environment, coupled with a prolonged period of inflation, will force businesses into a corner to make challenging decisions. They likely will not perform as well as they desire, due to penny-pinching, recession-fearing consumers.
Fear will grow out of less-than-favorable earnings and moreover, layoffs. While we have already seen rounds of layoffs from market movers like Amazon (AMZN), Goldman Sachs (GS) and Meta (META), along with Tesla (TSLA) and Cisco (CSCO), we are likely to see even more layoffs across multiple sectors.
However, keeping in mind that a stock share price is not indicative of a company’s true value, here lies the opportunity, if we do not allow the headlines to panic us.
For example, let’s take Google (GOOGL), a NASDAQ staple and tech titan that has plummeted nearly 40% year-to-date. It trades for less than $100 per share, at just $89.20 per share.
Taking into consideration that Google’s revenue is driven predominantly by advertising, it should not be too alarming to see just how beaten down Google’s stock is at this time. As is well known, advertising budgets are typically the first to be reallocated during periods of market uncertainty. Yet, Google also hardly ever trades at a price-to-earnings ratio under 20. Currently, its P/E is 18.
In the near-term, there certainly could be some more volatility that may further hinder Google’s growth, but when companies come back around and need aggressive targeted advertising, Google will likely be their first thought, especially as we only march further into a digital era.
Furthermore, we will see companies that sell luxury goods burdened by our economic backdrop. None will suffer more than the tech kingpin, Apple (AAPL).
Currently, Apple is down by 27.13% on the year, trading for 1/8 the price of one of their new iPhones at $131.86. Apple has not only struggled from supply troubles due to a disrupted supply chain, but reduced demand as consumers remain apprehensive towards spending luxuriously.
Now, Apple still trades at a bit of a premium, with its price to earnings ratio above 20 at 21.6, but after all, this is the world’s most valuable company by market capitalization: its market cap is $2.10T.
Not to mention, as history illustrates, periods where consumers are restricted often births periods of unrestricted spending. That may play to Apple’s favor, come an eventual economic turnaround and beyond.
Conclusion – Opportunities Await in 2023
In summary, our economic backdrop may not look ideal, given the high inflation environment. In 2023, we will have a high inflationary environment, along with a rather hawkish Federal Reserve raising interest rates, but such environments create opportunities for investors willing to pay the price of patience.
But if you still are at odds with whether or not to invest following a Grinch’s market ending to 2022, at least TipRanks is here to gift you an end of year bundle, saving you $424. So take advantage of the discount on our Premium Subscription + a free one-year membership to our Smart Investor Newsletter!
