In recent months, share markets have been relatively resilient and some of the bear market fear has dissipated. So, is the worst of the share market turmoil over and is it time to buy?
The short answer is no.
My view remains that this market has another big move down ahead. How I think the market and economic events unfold over the next 12 months is this. Europe continues to fall into a deep recession for all of 2023. The US goes into a recession too. Ultimately dragging the rest of the world’s economies into a recession. My priority remains protecting investors’ capital. I am prepared to miss out on short-term gains by being under-invested if I am wrong. In my opinion, this remains one of those periods in time where protecting the downside risks is significantly more important than any potential opportunity. It is prudent to be cautious in this environment. We will still have our capital intact and can invest in great opportunities in due course. What I don’t want to do is invest too early when sentiment is overly positive because everyone wanders back outdoors in the eye of the storm. The real economic storm is still ahead.
In 2022 all the talk was about inflation and interest rates. That will continue in the early part of 2023 as central banks around the world are forced to over-tighten and create deeper problems. My view is that in 2023 the key topics will become company earnings, global recession, and unemployment. Unlike any previous downturns in the last 20 years, where constant bail outs and money printing supported markets, government’s hands are tied this time around. Countries around the world will simply need to endure an economic downturn the old-fashioned way, take some pain and come out the other side with a better foundation for future growth. It’s not the worst thing that can happen and frankly, if we’d all faced up to a couple of downturns in an organic way, we’d be far better off right now.
But in any case, if Europe and the US are in recession, and China continues to battle covid then it’s difficult to see how Australia avoids an economic downturn in 2023. I know everything seems pretty good now and it doesn’t seem like we are anywhere near a recession, but a downturn is heading our way. When you look at how the world is positioned, a deteriorating global economy is pretty obvious. The problem for most investors in accepting the impending economic reality is that there is a major difference in what we all see and experience right now in our daily lives versus what we can’t yet see and experience in the near future. Overlay what most investors optimistically want to see and it’s often only when things are undeniably bad that it’s finally accepted.
Over the next 6 months, I think we see corporate earnings deteriorate and consequently real cost-cutting across the board. Then the job losses really start to kick in. First with European companies, then the multinationals with significant exposure to Europe, before flowing through to the rest of the global economy. They have started in tech already but will become mainstream in due course. The tricky part for investors will be when we start to see inflation fall, share markets will start to celebrate the return of low interest rates. That’s going to be a monumental head fake for markets as the dream of a return to lower inflation and lower interest rates becomes an economic nightmare in the form of a global recession. In 2023 the downturn will get real. The real economy will start to suffer. That’s when stock markets will enter the final phase of this bear market and crash back below the lows of 2022. If inflation stays persistently high, it will only make the downturn worse.
That said, there is an important distinction to make here between the share market and the economy. I expect the economic situation across the world to deteriorate for most, if not all of 2023. But while I expect the share market to fall significantly as the economy weakens, by mid-year, investors will be looking ahead to how the global economy will be starting to recover in 2024. Share markets don’t wait for the actual economic recovery, they are looking 6-12 months or more into the future. So, while I expect more share market pain ahead, the real buying opportunities will present themselves around the middle of 2023, as the deteriorating economic situation is still unfolding. Take note of that because the time to be bold and buy stocks is when it feels like the economy is starting to look quite bleak, but before the economy is at its worst.
General Advice Disclaimer. This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.