Avoiding the Worst Mistake Investors Will Make in 2023
by Alma Winkle January 17, 2023 in Market
Avoiding the Worst Mistake Investors Will Make in 2023
The biggest mistake investors will make this year is not to get caught up in a stock after a disappointing earnings report. And with all due respect to economic forecasters, it wouldn’t be wrong of the Federal Reserve The solution to fighting inflation – or the rising risk of recession – as the central bank raises interest rates at the fastest pace since the 1980s.
The chances of another big fall in the stock market are increasing. As my partner Elliot Gue wrote for us this week Whistle Trader member, the S&P 500 And the ETFs that track their performance are highly concentrated among a few very expensive stocks. And that’s a proven formula for damage.
The 10 biggest names in the S&P 500 by market capitalization, for example, account for 26 percent of its total value. The top 50 names—the new Nifty 50 if you will—have over 56 per cent, close to the share they had a year ago when the stock market began its decline.
Worse, the S&P 500 is priced at 30 times normalized earnings as calculated over the past decade. And there’s rarely been a more dramatic downside risk to earnings estimates for the next 12 months.
Profit margins have been under pressure for over a year due to inflation. If the economy is hit by a recession, they will contract a bit further. And many companies are at risk of a substantial increase in debt interest expense, especially if they rely on variable rate debt, face significant debt maturities and/or are accessing capital markets for investment.
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Last year, technology-heavy Nasdaq 100 It proved particularly vulnerable to high valuations and margin risk, resulting in the loss of about one-third of its value. This year, other sectors are technically likely to join the weakness, possibly as soon as Q4 earnings and guidance updates come out over the next month.
The economic crisis of 2022 has hit all possible sectors
Getty
But the biggest mistake investors will make in 2023 is not being defensive enough. Rather, when the Fed declares victory over inflation and eases the pressure on interest rates and the economy, this will not be the case for the foreseeable future.
This is high long-term inflation.
Raising interest rates to reduce demand is a time-tested method of reducing inflation in the near term. But the increase in borrowing cost also reduces investment. So when the Fed eases, supply lags behind demand, which drives up prices even more and worsens inflation.
For example, from July 1967 to August 1969, the Fed raised benchmark rates from 3.79 to 9.19 percent. From July 1971 to July 1974, it helped push the economy into a deep recession by raising rates from 4 to 13 percent. And from August 1977 to May 1981, the Volcker Fed raised rates from 4.75 to 20 percent, nearly triggering a global recession.
Yet every time the Fed backs down, inflation returns with a vengeance. This includes the 1980s, when after Volcker crashed the US dollar, the price of oil more than doubled in a 12-month period and gold rebounded to its all-time high of $800 an ounce in late 1987. .
Only the rise of China as a low-cost producer—along with a combination of persistent pro-investment fiscal and monetary policy—finally closed the supply/demand gap, and ended the inflation of the 1960s, 70s, and 80s. .
It is a myth that many investors did not build real wealth in the 1970’s and 80’s. But being successful requires taking control and positioning to do well in times of inflation. Simply buying the market averages didn’t cut it.
The popular investment media is now full of stories about investors postponing retirement into 2022 due to losses. And unfortunately, those relying on index ETFs are going to feel a lot of pain in 2023.
But the past year was also full of opportunities for those who educated themselves about what to buy, and acted on that knowledge. For example, in early 2022, the oil and gas sector was near its all-time low percentile of the S&P 500, and many institutions avoided it altogether. But it rebounded about 65 percent of the index’s 18 percent loss. And the most popular ETFs almost entirely missed out on that advantage because of the concentration in the big tech names.
The many investments that do well in times of inflation should be obvious. Energy, for example, is still in the early innings of a long-term upcycle rooted in years of underinvestment.
Regardless of the priorities of developed world governments, oil and gas will remain the world’s major fuel sources for years to come. And policies that discourage investment in new drilling – as well as essential infrastructure like pipelines – will only worsen the long-term imbalance between limited supply and still-growing demand.
In contrast, governments are underwriting spending on the deployment of renewable energy. But higher oil and gas prices, as well as margins for wind and solar generation, will increase. And so will the prices of key natural resources needed to deploy renewable energy, from copper and iron ore to battery metals like nickel and lithium.
You may not have thought of real estate investment trusts (REITs) as inflation beneficiaries. But inflation has been a reliable driver of both higher rents and land values.
REITs give investors the benefit of owning real property without the hassle of managing it. And the best in class will see big increases in income, dividends and share prices in the coming years, from scarce residential properties to industrial sites and even agricultural land like REITs. Farmland Partners (NYSE:FPI).
Companies that can pass on higher costs to customers will also prosper in times of inflation. And their ranks include major players in a surprising range of industries, from food service to regulated utilities. Even some bonds will be big winners, provided buyers time the purchases and stick to near-term maturities.
Bottom Line: Whether your objective is income, wealth creation or speculation, you need to take control of your money. Buying ETFs is not that easy. But with effort, you can build real wealth in times of inflation to come, even as the average investor sees their savings slipping away.
Top quality REITs are selling at their lowest prices since the pandemic. Click here for my picks for 2023,
