History rarely repeats itself but it does often rhyme. To speculate on what 2023 may bring to investors in the stock market, we need to see how does last year compare with other market downturns.
First few years of this millennium (1999-2002) was the last debacle when technology stocks got serious shellacking. Called the dot com bust, it saw many high fliers like Nortel and JDS wipe out along with serious price erosion for others like Amazon, Microsoft and Cisco. This last bunch not only survive but came back to make all and much more of the losses. In a way, there are similarities. We can call this one the pandemic boom. In 2021, no one really knew what the future held. So just as families faced with catastrophe, spend whatever is needed to recover, most economies that could did spend whatever was required. And just like families end up with heavy debt exposure, the developed world has amassed huge debt. It would need years if not decades to make whole.
Catastrophe, wars and even pandemics are not necessarily a death knell for markets, often they clear up excesses we tend to accumulate during booming markets. That clearing up process took out hot stocks like Tesla, Shopify and Bitcoin first (fortunately we have none). But the mood turned pretty bearish and many others also got trashed undeservedly like Google, Amazon and even Canadian banks.
In 2022, Canada did better than US, TSX was down -6%, while the US index S&P 500 was down by -18%. Bonds were also trashed returning-12%. There were no winners. Last quarter was better than earlier results and first few days of 2023 also look better. But this is way too early to get hopeful.
Higher rates seem like an old story. The biggest uncertainty now revolves around how much of an economic downturn we face and what they will do to even the so called conservative stocks like banks, phone companies and utilities, all down in 2022. We would need a few more months of results from companies to get a better feel for how far and how long would this malaise last.
Given the chaos, maintaining a modest posture in dividend paying stocks with more in short bonds or cash equivalent securities seems to be the best strategy. The situation could change fairly quickly so we must be vigilant.