WEEKEND WRAP: Some Ideas for 2023

Part 3 of 3

Parts 1 and 2 of this extended WEEKEND WRAP covered results from 2022 and a recap of some major economic trends leading to 2023. Admittedly, Part 2 left out quite a bit of context about Russia’s response to sanctions and the bellicose posture of the Western alliance of nations, but that, and more, will be covered in this section.

Please bear in mind that whatever asset classes or specific stocks or issues mentioned here are merely suggestions. Money Daily is not a financial advisor and all investments involve risk. Do your own due diligence.

Since Money Daily is not usually engaged in predictions, this exercise in plotting out the future might not be all one needs to prosper through 2023 and beyond. Rather than take a step-by-step, asset-by-asset approach, it may be more constructive to gather up all the moving parts and inspect them individually and see how they coalesce for a more holistic approach.

There are enough competing narratives to make even CNN producers squirm a little bit. Not only is the Russia/Ukraine conflict reaching further into the economies of all involved, there’s that issue of inflation, fuel costs, food costs, production bottlenecks, sanctions, new politics in Washington, D.C., woke agendas, middle American backlash, pension fund decimation, Fed policies and probably a swarm of black swans circling overhead.

Putting it all in perspective isn’t a task for the meek or feeble-minded, but, we’ll take our best shot.

First, everybody has to eat, so the most basic decisions will be made over nutrition choices. Americans, and, by and large, Europeans and Britons, aren’t going to go hungry. Despite all the scare-mongering over a coming food crisis, one is unlikely to materialize in developed nations. After all, there’s money to be made all around, and proof that companies will raise prices whether basic inputs cost more or not can be found in the charts and third quarter reports from PepsiCo (PEP) and Coca-Cola (KO), two multi-line food and snack providers, both of which weren’t shy about raising prices 15-20% across the board in their most recent filings.

From early October (post-earnings) through early December, Coke put on about an 18% gain, while Pepsi, with its higher share price, added about 14%. Both flattened out through December and into year-end, but they’re both likely to report a solid, if uninspiring, fourth quarter and possibly produce some short-term gains, given they are legacy outfits offering a dividend despite relatively high p/e ratios (in the mid 20s).

What may be worrisome for those considering investing in the food sector is the threat of a recession, tighter household budgets and finicky consumers who may shy from big branded, high-priced processed food and opt instead for more nutritious meat-and-potatoes offerings. Then again, their brands are strong, people are stupid, and not very health conscious. One could find worse companies than these old-time stalwarts, but you'll pay plenty for them as they’re near all-time highs.

Prudent investors might want to pass on these if only because they’re pricey.

Whether there’s a recession in our future and whether its deep and long or shallow and short, people will still want to eat out, so McDonald’s (MCD) or Yum! Brands (YUM) might be on the menu. Both hung in well through 2022, with Mickey D’s the better, down only 2%, while Yum shed six. Again, as is the case with most big-name stocks, they’re near all-time highs. McDonald’s carries a 32 multiple.

Both of these companies will be profitable and relatively safe plays, but, for the money, not the soundest of plays in a year that promises many ups and downs. Waiting for the eventual recession (which we’re probably already in) and lower prices may be a better play. The entire food segment is worth watching and may perform better in the second half. Taking matters into one’s own hands and growing some of your own is never a bad idea, cutting your food costs significantly.

Before delving any further, it should be addressed that stocks are probably going to keep falling at least through the first half of the year. The potential for a big, loud crash is evident. Besides the NASDAQ’s 34% drop in 2022, the Dow, which lost just 10% and the S&P, down 20%, look like bargains. The fact that their 2022 returns were just under 10% and 20% was not an accident. There’s more downside to come.

The Fed is going to keep raising rates at least for the next two FOMC meetings. Even if they pause at the May meeting, they’re not about to just reverse course and start cutting rates, recession or not. They have a long history of standing pat for months on end, even years go by without a significant policy move. Once they quit hiking rates, they’re more than likely to just keep them there for quite some time, probably into 2024, so, if money costs are 4-5-6% and CDs are offering 5% or more, even if inflation is 7 or 8%, plenty of dough will go into bonds and other fixed income funds and ETFs.

Treasury yields are going to be a great source of income for plenty of retirees and people and companies who shed risk and take what’s available. Bonds, for income, are going to do quite well in 2023 and probably well beyond that. Just be sure you get return of capital in addition to return on capital.

Those of the buy the dip persuasion got slammed hard in 2022. Those days - of ever-higher stock and index prices - are over. The trend has morphed from piling on to piling out of stocks that don’t perform. Shorting, selling call options or buying puts against individual stocks may turn out to be profitable, both short and long-term. Unless you’re in defense stocks like Raytheon or Northrop Grumman, there’s plenty of downside risk in just about every sector.

While a recession with layoffs may prove positive for bottom lines of some companies, eventually, lack of top-line growth will erode those profits. There’s a thing about demand destruction. It is pervasive and persuasive, capable of taking down even the best of companies when the herd runs the other way.

Tech stocks are out. As a whole, they’re too volatile, don’t pay solid dividends and are still overvalued. Apple, Google, Tesla, Amazon, Meta, Nvidia, Netflix, Intel and a host of others took serious losses in 2022 and haven’t yet bottomed.

Crypto is also out the window, except for bitcoin itself. For all the scandal and sketchy behavior associated with the crypto universe, bitcoin still is unscathed as far as operational integrity is concerned. Bitcoin itself has not been hacked, broken, manipulated, or scarred. The blockchain has not even shrugged, though the price action has been unnerving. At around $16,000, it may be worth a go, if only to shield some currency from regulators, friends, or foes. It’s supposed to be "money" so maybe people should start treating it that way, i.e., store of value, medium of exchange.

It could go higher or lower, but, considering the various geo-political threats out there, upside seems more the logical direction.

Gold held up well in 2022, up 1.67%, despite a deep dive from March through November. Silver was the stellar performer, up 6%, and an encore is as likely as a repeat performance for years. Precious metals may finally emerge as the real money they are, and, in a world that is increasingly looking at an East/West split, further deterioration in the value of the US dollar as reserve currency and potential devastation in all fiat currencies, both gold and silver appear poised for breakout runs.

Rounding out, oil and gas at the pump are going to fluctuate around $75-80 a barrel and $2.50-3.50 a gallon depending on where you live. Unless the federal government reigns in spending, there will be pricing power and inflation. There’s still far too much liquidity in the system. People aren’t failing yet. Companies aren’t going broke, but, there’s only so much strength in a stand of string and the Fed and government are pulling on both ends. Eventually it’s going to snap.

As far as housing is concerned, prices in general need to come down some 30-50% or more in some areas. Commercial real estate is playing a dead hand after the COVID shutdowns. Far too many people found out they could be just as productive working from home than in the office, and that trend sees no signs of abating. Any work done on a phone or computer can be remote. Office space is old hat, much of it being converted into housing or mixed use. Dabbling into some of the more speculative REITs may prove bountiful.

Bottom line, stocks are probably going to be up less than five percent if that. Flat to lower is more likely, with steeper losses coming in the first half and some gains in the second half, though that scenario could easily be reversed. If it plays out as expected, second half gains may just cover the losses from earlier in the year.

There may be some bargains in real estate, but not before foreclosures and individual bankruptcies begin to bite. Arable land is expensive in many parts of the world. Commercial space is still pricey, but getting to distressed levels in smaller communities. Residential will be sucking it up big time because of tighter lending standards and higher interest rates. Deaths from disease and pharma and a shrinking birth rate are evening up the score. Look for residential to drop another 20% this year.

There is plenty of excrement flying around and plenty of fans by which to blow it back in one’s face. Speculation is like day-to-day ju-jitsu. It’s hand-to-hand, hand-to-mouth. You'll have to be agile and alert. By the this time next year, a 3-month CD may have become your new BFF.

OK, this isn’t our bag and you’re looking bored, so, here are some numbers. Highs (H), lows (L), and year end (YE) figures for various assets are below (this looks better in table format, but Substack doesn’t do HTML):

Dow Jones Industrial Average: High: 34,265; Low: 23,250; Year End: 29,335

NASDAQ: H: 12,090; L: 8,605; YE: 9,780

S&P 500: H: 4,072; L: 3,135; YE: 3,375

NYSE Composite: H: 15,590; L: 12,200; YE: 13, 867

6-month Treasury bill: H: 6.65%; L: 4.42%; YE: 6.07%

2-year Treasury note: H: 6.05%; L: 4.25%; YE: 5.65%

10-year Treasury note: H: 5.77%; L: 3.94%; YE: 5.45%

30-year Treasury bond: H: 5.44%; L: 3.79%; YE: 5.55%

The yield curve will remain inverted, albeit much flatter.

WTI crude oil: H: $96; L: $58; YE: $75

US national average gas: H: $3.90 L: 2.65; YE: $3.00

Bitcoin: H: $25,800; L: $15,240; YE: $25,280

Gold: H: $2345; L: $1780; YE: $2288

Silver: H: $34.80; L: $22.50; YE: $33.60

As Tony Shalhoub’s character, Adrian Monk might say, "I could be wrong, but I don’t think so."

Happy New Year

This article was simultaneously published at Downtown Magazine.