It’s never too early to evaluate and adjust your outlook for the future.
That’s particularly true if you’re an investor, considering economic and market conditions can change dramatically and rapidly. When they do, you need to change your trading strategy accordingly.
So let me briefly revisit a few predictions I made just over a month ago about 2023.
On December 14, we published the January issue of The Oxford Communiqué. In that issue, I made three predictions about the economy and the stock market in 2023.
- A soft-ish landing for the economy: I said the U.S. economy would not crash this year and we would likely avoid a recession (which most prognosticators were forecasting for 2023) as inflation continues to drop, allowing the Fed to slow its pace of interest rate hikes.
- A good third year: I predicted that the presidential pattern would hold this cycle and that the third year of President Joe Biden’s term would bring an uptrend in the market.
- A small cap boom: I said that 2023 would be a very good year for small cap stocks in particular.
I realize it’s only January, but I think it’s a good time to see if these predictions at least have a chance of playing out this year.
Because if they don’t, I’ll adjust them. I’m a big believer in the idea famously attributed to economist John Maynard Keynes: “When the facts change, I change my mind.”
That’s not to avoid accountability. Instead, the idea is to take into account new realities and developments and make the necessary changes to the future outlook.
So how are my predictions going so far?
As for the economy, it’s very early but… so far, so good.
The economic data that has come in so far this year shows that the labor market is slowing.
U.S. employers added 223,000 net new jobs in December. That’s the smallest gain in a year, which should help mitigate inflation and bring it lower – just what the Federal Reserve ordered up.
Yet the jobs number also remains somewhat healthy, which is important if we want to avoid a recession this year. Remember that consumer spending is the primary driver of the U.S. economy, and a strong labor market is the primary driver of healthy consumer spending.
Inflation also slowed for the sixth straight month in December, to 6.5% year over year. At this pace, the rate should dip to a very acceptable 4% or lower by the third quarter. (And I also believe the Fed would secretly accept an inflation rate below 4% as good enough for a while.)
So if the economy continues on this course, expect to avoid a recession this year.
A Good Third Year
Since 1939, there has been only one down year for the Dow Jones Industrial Average in the third year of a presidential term.
A month ago I said this pattern would likely hold for Biden’s first term.
And it has, in just about every way you want to measure it. The S&P 500 Index is up 4.4% this year. The Nasdaq Composite is up 6.7%. And the Dow Jones Industrial Average is up 2.4%.
Those are extremely healthy gains for just a few weeks into the new year.
Can that rally continue and turn into a new bull market? The answer is heavily reliant on whether the economic soft landing and Fed pause that I predicted play out as expected.
A Small Cap Boom
Finally, I predicted that small cap stocks would be one of the brightest spots in the market in 2023.
Why? Because smaller companies tend to be more focused on services than goods, more domestic, and less dependent on international markets. Those trends are all ripe for 2023.
So how’s it going?
Here’s a chart that shows the year-to-date performance of the S&P 500 (large caps), the S&P 600 (small caps) and the Russell 2000 (a broader view of small caps).
As I previously mentioned, the S&P 500 Index is up 4.4% this year… not bad at all.
But the S&P 600 is up 7% and the Russell 2000 is soaring at 7.6%. Truly impressive.
And microcap stocks are keeping pace. They’re up 6.4% as measured by the Dow Jones Select Micro-Cap Index, which you can find here.
Will small cap and microcap stocks continue to dominate as 2023 proceeds? I think they will… again, as long as the economy avoids recession.
I know, I know. It’s still very early days. Many things could happen to upset this applecart.
China could go back into COVID lockdowns, throwing the global economy into another tailspin. Energy prices could soar and hurt the U.S. and European economies in particular. Inflation could get stuck at current levels, leaving the Fed no choice but to resume large rate hikes.
I don’t expect any of these things to happen, but I can’t rule them out.
If they do, I’ll adjust my outlook for 2023. And you’ll be the first to know about it.