The S&P 500 rose 7% in the first quarter, but ended 2022 down 19%, its worst year since 2008. Bonds had their worst year ever. The outlook for 2023 is a mixed bag at best in an environment in which earnings will be falling and interest rates will be rising. Ordinarily, that is not a formula for good returns. But these are not ordinary times.  

As I’ve written many times, investing in stocks is all about future earnings and interest rates. While over the long term stock prices and earnings each grow at 8% annually, in any single year returns can be far apart. Last year is a case in point.

In 2022 the story for the market wasn’t about earnings, which analysts and Wall Street correctly forecast to grow compared to 2021 when COVID was the main problem. The story was about the other key factor, interest rates. Market strategists missed the interest rate surge by a mile. So did the Fed, which insisted for too long that inflation was transitory.  A year ago the overnight interest rate was close to zero and forecast to be 0.5% now. Today it is 4.25-4.5% and set to rise again soon. Make that two miles.

The Fed’s rate hikes made it a good year for cash, which was last year’s best asset class. As the year began the yield on Schwab’s Treasury money market fund was zero. Today it’s 3.9%.  

Most professionals see the stock market going nowhere next year. Up a touch, maybe down a bit. On the surface the outlook for rising rates and falling earnings should create an unfriendly environment for stocks. And were it not for the fact that the outlook is shared by nearly everyone it would. But the market seldom accommodates the majority so those with vision who see what others do not reap the largest gains and they should. That has always been true.     

I’ve now come full circle to this year’s outlook. The market’s performance will depend on future earnings and interest rates, not 2023’s numbers. Earnings will be down in 2023 but the outlook for 2024 will be improving in the second half and reflected in rising stocks. Interest rates will level off early in the first half then fall into 2024. Stocks can have positive returns under those conditions. Bonds can, too. The pain the Fed has caused is nearing an end. There are better days are ahead.

David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.