What Does History Predict for 2023?

•  Shai.Gal

•  Dec 30 2022
 

Over the past 100 years, 70% of the times the S&P fell in a given year it rose the following year, with an average rate of increase of 12.6%. Is this what is expected next year?

The stock market will end 2022 with sharp declines. The S&P500 is on track to end the year down about 20%. It doesn't usually happen and there's no reason to think this time will be any different. 2022 is going to be the "worst year" for the stock market in 14 years.

So the headline for the year 2022 in the markets is "a very bad year" but does that mean that next year will also be bad for investors and the markets will go down? Not necessarily.

The reason for optimism is not changing the last digit in the calendar year from 2 to 3. It doesn't really mean anything. The stock market does not operate according to time frames of "good" years and "bad" years. There is no real significance to the fact that in a week a year will change, beyond the fact that in statistics the days of the coming week will still be considered as days of the current year and from next week they will be considered as days of the next year.

Despite this, there are much more chances that in 2023 the stock market will rise. The stock market is more of a 'marathon run' than a sprint: you run for the long term while remembering that along the way there are years of declines. Although we have become accustomed in the last decade to seeing markets that are only rising, but this cannot be the case. In any case, statistically speaking, from 1928 until today, there were 25 years in which the stock market ended the year in decline, and only in less than 10% of the cases were there two consecutive years of declines.

The prospects in the stock market are with those who are optimistic in the long term. When you gamble in a casino you lose because the odds are against you, but in the stock market the statistics show this - usually, after a year of declines in the stock market comes a year of gains. In 17 out of 25 years in which the stock market ended in decline - the year after which the indices rose. The average rate of increase is 12.6% this year. That is: the chances are that in 2023 the stock market will rise, even significantly.

This is of course uncertain. There are many risks - the interest rate that continues to rise, the high inflation, the continuation of the corona virus in China and the tensions with Taiwan, the continuation of the Russia-Ukraine war, entering a recession and more. If these macro events surprise for the worse this year could end with a continuation of declines, only the odds are in favor of gains.

When did the stock market fall two years in a row?

To find two years of consecutive declines, you have to go back to the year 2000, when the stock market then fell in both 2001 and 2002, that is, 3 consecutive years of declines. Before that we are talking about the years 1973 and 1974 and before that we have to go back to 1939 and then 1940 and 1941 which were three consecutive years of declines.

However, the statistics also show that after a year of relatively moderate declines, of less than 10%, the chances of further increases are higher than a year like 2022 which will end with a sharp decline of 20%. According to the data, if the index drops by less than 10%, there is an almost 80% chance that it will rise the following year, while when the index drops by more than 10%, the chances of an increase in the following year are only 55%.

Two consecutive years of declines

It was not just a sharp drop the year before, but also a significant geopolitical event that led to the continued decline. For example, the Great Depression of the years 1929 to 1939, World War II and the Arab oil boycott in 1973, or the bursting of the dot.com bubble in 2000, which was followed by the attacks of September 11, 2001 and the subsequent war in Iraq.

At least according to the statistics, given that no significant geopolitical event will occur next year, it is likely that we will see the markets rise again. Even in 2008, after that 38% crash, the following year was a bullish year for the markets, with the S&P500 rising 23%.

Following the subprime crisis in 2008, the Fed sharply lowered interest rates and markets soared. If in 2023 inflation calms down, following the Fed's rapid interest rate hikes, and he can start lowering interest rates - this may be a good catalyst for increases in the markets.

The Fed at the time also decided to greatly increase its balance sheet by purchasing mortgage-backed securities and provide stability to the markets. This does not mean that this is how the Fed will react this time as well, and perhaps it should not be that way. He needs to reduce his huge balance sheet and not continue to increase it, and still even to end the process of raising the interest rate, and maybe even lowering the interest rate, may help the markets to climb again.

Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

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