Stock Market 2023: The Big Come Back?

  (Drivebycuriosity) - Finally, the year 2022 came to an end. It turned out as annus mirabilis. The S&P 500, the gauge for the US stock market, lost 20%. Technology stocks did much worse. The Nasdaq, which represents the technology sector, fell 33%. The darlings of the past suffered a lot: Amazon lost 50%, Tesla tanked 65% & Meta melted 64% (chart above kedrosky).

What caused the selloff? In 2020 & 2021 the US government flooded the economy with trillions of dollars, supported by huge bond purchases by the Federal Reserve. Over the recent two-year period, the US money volume M2 jumped about 40% as a result. The money deluge met a constraint supple of goods & services, partly of covid19. It is no surprise that prices increased so much (marginalrevolution).

Now the Federal Reserve is fighting inflation by hiking her interest rates. In 2022 Wall Street was obsessed with actual - and expected - interest rate hikes which ruined the sentiment. The herd of hedge funds and other big portfolio managers responded myopic as usual. They panicked and dumped everything what seemed risky.

But the fundamentals are getting better. Inflation - the main cause of the melt down - has already peaked. The flooding by government checks run out and the money supply growth, the engine of the inflation, came to an halt. There`s no need for further interest rate hikes. It´s quite possible that the Fed will cut interest rat in the run of the year - and the myopic crowd has to change  course again. 

History shows that the stock market always comes back and climbs to new all-time highs. In the long run the stock market follows an upmarket trend and is even accelerating. Bear markets, meltdowns and crashes are temporary and great purchasing opportunities.

 

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The logarithm chart - which shows changes in percent - gives a much better impression.

 

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The perpetual positive long-term upwards trend will continue. I still believe that the Covid19 pandemic started a new Roaring Twenties, comparable to the boom phase which happened during the 1920s years after the Spanish Flu. Covid-19 changed behavior and accelerated the fundamental trends that have been shaping economy & society in the recent decade. During the pandemic the rise of the Internet gained even more speed and turned into a great leap. The pandemic reduced the resistance against technological progress (faz.net ). The crisis forced many people to work at home, to learn, shop, educate & entertain themselves from home. These trends are fostering digitization and raising efficiency & productivity of the economy. 

The virus boosts the digitization process, which is fostering productivity across all industries, leading to more economic growth. Microsoft`s CEO Satya Nadella said "the pandemic has proven the PC’s central role in keeping people connected, productive, and secure ...What we are witnessing is the dawn of a second wave of digital transformation sweeping every company and every industry" (transcript ). Nadella also noticed that “two years of digital transformation took place in two months” ( microsoft ).

We are witnessing an accelerated shift toward digital technologies that are faster, less expensive, more productive and raise creativity. Companies are compelled to streamline operations and they are using more & more Internet & and other software applications to get more efficient, creative & productive. The pandemic forced them to get faster and make their products & services cheaper and more convenient. These changes are accelerating the ongoing digitization process, using Internet and other software applications more intensely. The CEO of Bill.com, an online service, said: "We believe the ongoing pandemic has accelerated the need for businesses to focus on digital transformation” (seekingalpha). 

Covid-19 made the companies fitter and more efficient than before which translates into climbing profits. I believe that this learning process will continue and will fuel a long term trend of rising company profits & stock markets and 2023 will show a come back.