I discuss my current investing outlook for 2023.
Some of my friends have been asking me, “are you buying stocks or are you more so waiting in cash?” And the answer is it depends.
While the stock market has come down somewhat over the last year, the market may not be that on sale yet.
After the SPX reached the all time high of 4800 in early 2022, it’s only come down about 17% to the 4000 mark and has been trading sideways in a general downward trend.
Based on the “Buffett Indicator” of the Wilshire 5000 Total Stock Market Cap to US GDP, the stock market is still highly valued. Based on the FRED Buffett Indicator, it’s come down from 250% in Q4 2021 to 190% in Q4 2022. That’s still 90% above the fully valued 100%, and Buffett historically considered the market on sale between 60-80% Wilshire to GDP.
According to Current Market Valuation, the 164% reading would suggest the market is still about 64% above the historical trend. So while some stocks have been on sale, by and large, the overall market is not entirely on sale by these measures.
With the Federal Reserve hiking the Fed Funds Rate to bring down inflation, the markets have been coming down somewhat but not in a manner of mass fear. I imagine there’s some boogeyman lurking out there, whether it’s in corporate debt or national debt or something else, that could bring a crisis in the stock market to make stocks eventually go really on sale.
While the Fed has done a decent job of bringing down inflation from the June 2022 high of 9.1% CPI Inflation down to the 6.5% CPI Inflation in December 2022, the Fed Funds Rate is likely going higher for a while in the Fed’s aiming of returning inflation to the 2-3% range.
With the Fed Funds Rate range currently at 4.25%-4.5%, it will likely go to 4.5%-4.75% by February 1, then likely 4.75%-5% in late March 2023. This is a good sign for savers and I’m guessing there will be more bank savings offerings with high yields in the coming months.
The US Treasury bond inverted yield curve has been one of the best at predicting recessions. With the inverted yield curve showing its most negative spread between the 10 year and 3 month US Treasury Bond, it’s looking like a recession is very likely to happen in 2023.
If people want to wait for stocks to really go on sale, or just don’t want to get caught up in stock market volatility, they could look at high yield savings or Series I bonds.
I’m hedging my bets by keeping some cash in high yield savings accounts, although a Series I bond might also be of interest to some people. The current Series I bond rate is 6.89%, and if you redeem it after a year I reckon the net rate would end up being around 5.17%.
And in spite of the US GDP growing by 2.9% in Q4 2022, there are signs the US economy is cooling in 2023. Even though we flirted with a potential recession in the first two quarters of 2022, signs like the inverted yield curve are suggesting we’re likely having a recession in 2023.
I’m going to be studying companies to see if they’re also in my circle of competence. For example, since Berkshire likely has over $100B in cash, they seem to be waiting for stocks or whole companies to go on sale. But this hasn’t stopped them from buying Taiwan Semiconductor Manufacturing Company (TSM) though we don’t know if Buffett was the one to actually buy it for the Berkshire portfolio, unlike what a WSJ article suggested.
Overall it’s definitely a mixed bag of what’s going on in the markets, but if you find stocks on sale that you have conviction in it might be a good investing opportunity. On the other hand, if you want to wait for better deals, there could be compelling interest rates in fairly “risk-free” options like a savings bank account or certain US savings bonds. While this is not advice, these are some of the factors I’m considering as I weigh how much to invest and save this year.
I hope you found my thoughts helpful as just food for thought!
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