Illustration by TERRY WONG/AGOODSON.COM
Almost no one expects it. That makes it more likely – and powerful. And shocking.
Whether 2023 starts strong or weak, abundant unappreciated forces support a stealth stock and bond bull market. The S&P/TSX Composite and world stocks should rise double digits, 15 to 35 per cent – maybe more. Why? How? While pessimism reigns from Kitchener to Kamloops, that naysaying negativity makes it easier for expectations to be exceeded by forces now in play. Whenever dour expectations exceed later realities, securities eventually rise.
Recall the first part of investing legend Sir John Templeton’s famous counsel: Bull markets are born on pessimism. Sentiment surveys show overwhelming dourness. For example, a recent Nanos Research survey found nearly nine in 10 Canadians think a 2023 recession is likely – or worse. The Business Barometer, an index compiled by the Canadian Federation of Independent Business, has plummeted since March, now rivalling COVID shutdown lows of April, 2020. In the United States, the University of Michigan’s Consumer Sentiment Index hit its lowest ever just this past June. It goes on and on.
Good news gets dismissed as false or fleeting – part of what I’ve long called “the pessimism of disbelief,” a behavioural quirk arising whenever market lows solidify. Endless bouts of, “yeah, but.” All news is bad. You see it, for example, as Canadian housing disaster talk rises – despite delinquency rates falling to 0.14 per cent through the third quarter.
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In a September column in this newspaper, I wrote how U.S. “midterm magic” election power could propel stocks in late 2022 and into 2023. Since October it has worked okay, for the gridlock-based reasons I described. Statistically, its positivity overwhelms. The magic rolls right into the third year of presidents’ terms (2023 in this case). The S&P 500 hasn’t suffered a negative third year of any president’s term since 1939, when the Second World War started (and then it was down only 0.9 per cent), averaging 18 per cent plus returns, in U.S. dollars, since good data started in 1925.
Better yet? The nine negative second years of presidents’ terms (like 2022), further turbocharged third years, garnering 28.7 per cent median returns. If U.S. stocks return 20 per cent plus, could Canadian stocks stink? Unlikely. Note, since 1969 (the start of consistent daily pricing), Canadian stocks have also fared best in U.S. presidents’ third years – positive for 85 per cent of them – with 18.3 per cent average returns. And third years that followed negative second years did better still.
But a recession is coming! the bears shriek. Maybe. Maybe not. As I detailed in November, lending remains too robust for that to happen soon, even as the Bank of Canada spikes short-term interest rates. That renders the recent Canadian yield curve inversion hysteria moot. Are you, as many are, handwringing over household debt decimating 2023? The problem is long overblown and market prices probably already reflect it. At 14 per cent, Canadians’ household debt service ratio – comparing debt with disposable income – is below the average during the 2009-2020 global bull market.
For stocks, ask a different question: If recession comes, who is surprised? No one. But no recession? That’s a big positive surprise. Even a shallow recession surely exceeds expectations, bringing a relief rally.
Illustration by TERRY WONG/AGOODSON.COM
So what should lead the market up? Historically, global bear markets’ biggest losing categories, broadly, bounce most in the next bull market’s approximate first third. That would be the dreaded big growth names in tech and communication services – and consumer discretionary firms such as European luxury goods makers, plus health care and growth-oriented industrials.
Hence, don’t expect the TSX to lead this global bull run. Canada’s sector makeup –notably the heavy energy overweight – kept the TSX’s maximum 2022 decline to minus 16.3 per cent versus the world’s minus 21.6 per cent. Note Canadian oil and gas firms surged. While these companies aren’t overstretched the way U.S. energy firms were after the mid-2010s shale boom, oil’s swift price reversal presents headwinds. Outperforming during the bear, they likely lag somewhat on the rebound.
Financials comprise more than 30 per cent of Canada’s market capitalization. Here and abroad, they were middle of the pack during 2022′s slide. It will likely be that way on the rise, too. Why?
Banks borrow short-term to finance long-term loans. They should be hit by falling long-term interest rates affecting future loan profitability. The reason, as I wrote in November, is that the inflation-phobia will fade in 2023. That takes pressure off those long-term interest rates. So they should fall, reversing much of their bonds’ putrid 2022 performance.
Yes, you read that right – long-term interest rates should fall, sparking a fixed-income rebound in Canada and beyond. Many observers currently extrapolate 2022′s bond market woes into 2023. But why? Government bond yields tend to wiggle together globally. And overall, they’ve actually fallen slightly for several months. Longer in Canada. Expect more.
One big 2022 surprise was bonds’ unusual positive correlation with stocks as both plunged. In 2023, that surprise should continue – but on the upside.
Short-term timing is always treacherous. Skip it. Don’t try. Simply position for a great year.
Ken Fisher is founder, executive chairman and co-chief investment officer of Fisher Investments.