2023: The terrible financial year that isn’t

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To hear doomsayers opine since late 2022, you might have come away convinced that 2023 would be an abysmal year for the economy and the stock market. Yet, as of late August, it’s clear that these dire predictions couldn’t have been more wrong.

Airwaves and headlines have buzzed all year with predictions of a declining market and an unavoidable recession. So widespread is this negative sentiment that it has become quite fashionable to be a market bear.

Fearing the warnings, many investors strapped in for a terrible year. But as things are turning out, 2023 so far is the terrible year that isn’t. And it will probably finish as the terrible year that wasn’t.

The U.S. economy has remained robust, the stock market is arguably in a new bull, and there are many indications that both will probably remain strong into 2024.

Vertiginous Hikes

The stage for pessimism was set in the spring of 2022, when the Federal Reserve board (aka the Fed) embarked on a steep series of increases in the federal funds rate to fight persistent inflation, bringing this rate to the highest level in 22 years. As of August, the total cumulative rate increase was 5.5%. Historically, rate increases have been a negative for the stock market.

When the Fed started hiking, rates were at a rock-bottom low, having been reduced to near zero in 2020 to stimulate economic growth after pandemic lockdowns triggered a recession. Just as the low rates (along with direct federal stimulus) triggered a bull market, continued rate increases ended it, and the galloping bull morphed into a sheepish bear in 2022.

This year has been different. But good economic growth and low unemployment didn’t brighten dark outlooks by a single photon, as these conditions only spurred fear that the Fed would continue to respond with rate increases to fight associated inflation. It did, punishing stocks somewhat, but stocks kept bouncing back, and the economy has kept chugging along.

The inevitable cumulative effect of the higher rates, various catastrophists still warn, will be a recession—no doubt about it. Some have been predicting an “imminent” recession since late 2022.

Lack of Faith

Underlying this pessimism has been a lack of faith that the Fed would be able to pull off a so-called soft landing, effecting lower inflation without triggering a recession, by imposing the right rate increases in the right measure at the right times. Yet a soft landing seems increasingly likely. The Fed, widely criticized for waiting too long to start raising rates, has probably received a major assist from inflation’s declining on its own from low supply increasing to meet high demand.

Nevertheless, pessimists have turned a blind eye to this, and to better-than-expected corporate earnings for Q2 and positive earnings forecasts for Q3. They’ve just postponed the recession’s arrival to early or mid-2023: “It’s coming! Be ready!”

Well, like rain, a recession is always coming. The question is when. Further, many economists have conceded that a mild recession might not do much to dampen stock growth. And some global economies (including ours, beginning in 2009) have had bull markets amid deep recessions.

Abundant Evidence

Although many Cassandras continue their shrill warnings, more moderate pessimists have recently been softening their outlooks in the face of abundant evidence of how completely not terrible—indeed, how good—2023 has been and likely will finish. Among this evidence:

• Good performance this year by large-company stocks. As of late August, the SPDR S&P 500 Growth ETF (SPYG), which tracks large growth companies, was up 15.5%. But from January through July, it was up 20.65% before pulling back. And as of late August, after a distinct downtrend in Q3, the Nasdaq index of tech stocks was still up 20% for the year.

Though up this year, the S&P 500 has been treading water on average for a couple years, with no new high since January 2022. But conditions now seem to favor good growth over the next couple years.

• Rapidly declining inflation. Inflation has fallen dramatically, from a 40-year high of 9.1% in June of 2022 to just over 3% in August. Though the Fed board is concerned that inflation embers could rekindle, this substantial decline is a game-changer for Fed monetary policy, signaling a likely end to the current rate-hiking cycle in the coming months. After such cycles end, stocks typically rise.

• Strong economic growth that’s likely to continue. In August. the Atlanta Federal Reserve estimated the annualized growth rate of gross domestic product (GDP), the total value of the goods and services, at a surprising 5.9% (adjusted for inflation). From 1948 to 2023, this number averaged 3.12%. In the second quarter of 2020, pandemic shutdowns pushed GDP growth down to minus 8.4%. That’s how far growth has come. Even if the 5.9% estimate is a statistical stretch, the actual number doubtless is a far cry from the recessionary (shrinking) economy that pessimists had predicted by summer.

Moreover, history shows the federal government is highly unlikely to do anything to impede growth the year before an election year. Quite the contrary; The party in power always wants the best possible economy to run on.

• Brisk consumer spending. As is their historical wont, American consumers keep on spending, stimulating the largest consumer economy on the planet. Consumer financial-health doubters point to rapidly mounting credit card debt, but with theunemployment rate at a fairly healthy 3.8% (reported in August), many have income to make payments. While the average consumer may be close to the bone from card debt, the well-heeled, who amassed $20 trillion in savings staying at home during pandemic, still have a lot of this cash left. The result is record estimated net worth and substantial wherewithal to spend and invest. Surveys showed some waffling confidence among consumers in general earlier this year, but this summer’s numbers reflect more optimism.

• Good stock earnings relative to prices, suggesting likely near-term market growth. Bears say stocks are too expensive, as indicated by their P/E ratios (price over earnings—what investors pay for a stock to get its earnings). They say high price/earnings ratios will discourage investment and suppress growth. But many large-company stocks have better valuations than many suppose. When you remove huge tech companies from the S&P 500, the index’s average P/E ratio goes from 19.1 to 16.9. (Seven or eight tech behemoths have an average P/E of 27.4.) These substantial differences show that a large swath of large-company stocks have more attractive valuations than bears will admit.

After being knocked out of kilter by the pandemic, leading to a roller coaster ride from Fed monetary adjustments, the economy is gradually getting back to normal. As this develops, the stock market will likely continue its long-term average upward arc.

In the shorter run, all the good news this year may be disappointing for doomsayers. They’ll just have to endure 2023 as the terrible year that isn’t and dread its likely legacy as the terrible year that wasn’t.

Dave S. Gilreath, CFP, is a founding principal and CIO of Sheaff Brock Investment Advisors, an investment firm for individual investors, and Innovative Portfolios®, an institutional money management firm. Based in Indianapolis, the firms manage assets of about $1.3 billion. The investments mentioned in this article may be held by those firms, Innovative Portfolios’ ETFs, affiliates or related persons. There may be a conflict of interest in that the parties may have a vested interest in these investments and the statements made about them.