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“The years ahead will occasionally deliver major market declines, even panics, that will affect virtually all stocks. No one can tell you when these traumas will occur.”
That quote comes from billionaire investor Warren Buffett, who in an annual letter to shareholders, talked about market volatility, suggesting that not only is volatility normal, but it should be welcomed for presenting great buying opportunities. Just as important, the Berkshire Hathaway (BRK-A) (BRK-B) CEO wanted to highlight the folly in those who believe they have a magic crystal ball and can predict what’s going to happen at any particular point in time.
In 2022, when looking back on the havoc that occurred in the market, it would appear everyone’s crystal ball malfunctioned. The effect of Federal Reserve’s monetary tightening to fight inflation was a key disrupter in moving markets in 2022. 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 in its policy decisions in four decades. All told, rates ended 2022 at their highest level since 2007.
In the process, stocks got punished due to lack of liquidity. 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. If you’re wondering why the Dow was able to outperform both the S&P 500 and Nasdaq by such a wide margin, it’s because the Dow’s composition, with defensive stocks comprising of nearly 30% of its weighting, afforded it some downside protection.
In the case of the Nasdaq, which is comprised of high-growth companies, rising interest rates pressured their businesses. In some cases, a majority of the businesses had to borrow at higher rates to fund their operations, or the consumers they rely upon were forced to cut back on spending. Take the FAANG stocks for example, referring to formerly Facebook, now Meta Platforms (META), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google parent Alphabet (GOOG , GOOGL). They have lost an average of 47% of their value in 2022.
When factoring that Tesla (TSLA) has also suffered 70% declines, 2022 was a nightmare for Big Tech, which collectively lost close to $4 trillion in market value. Compare this with the S&P 500, where its 10 worst-performing stocks saw a collective decline in value of roughly $1.6 trillion. Will Big Tech rebound in 2023? That’s hard to say, given that more interest rate hikes are still expected, not to mention a possible recession. Investors will be cautious until there are clearer signs the economy is on surer footing. On that note, the only credible crystal ball in 2022 was the Fed’s, who said that rates would continue to climb.
The degree of the effect rising rates would have on stocks was unknown, though it was understood that higher rates would apply pressure. An argument can be made that even as we firmly put 2022 in the rearview mirror, there is yet too much money flowing in the economy. Rates will likely continue to climb in 2023, albeit at a much slower pace. This constant removal of liquidity will help over time. Some analysts feel confident that the Federal Reserve can bring the economy to a “soft landing,” meaning as interest rates continue to rise, a recession might be avoided and inflation will continue to ease.
However, few analysts are willing to predict when the stock market will bottom out. After all, that is the ultimate question, isn’t it? But it’s worth noting that we are in a bear market. And historically, bear markets, which have been driven by monetary tightening (as this current one has) don’t bottom and reverse course until the Fed begins cutting interest rates. That said, there are many reasons to consider entering the market in the next few weeks, particularly since January has been historically volatile on the positive side.
For different factors, including tax selling and bonus money deployment, not only do stocks tend to rise in January, it’s been that way over the long haul, according to data from Standard & Poor’s. So, with 2023 upon us, I expect, and even welcome, market volatility, as Buffett pointed out. There are a basket of stocks, particularly those with solid top- and bottom-line growth projections that have suffered losses in 2022, to present strong buying opportunities in January and throughout 2023. After all, where there is volatility, there is also opportunity.
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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