Welcome to my interview with Jim Pearce, chief investment strategist of Personal Finance, Mayhem Trader, and Personal Finance Pro. Jim [pictured] was trained as a stock broker, and he’s been following Wall Street for more than 40 years.
As we face a new year fraught with uncertainties, now’s a good time to tap Jim’s uncanny prescience as a market forecaster. My questions are in bold.
Let’s get down to it. What do you think will be the dominant investment theme in 2023?
A return to normalization will be the dominant theme, which will seem anything but normal after three years of aggressive monetary action by the Federal Reserve in response to the coronavirus pandemic and then rapidly rising inflation as a result.
Shortly after the outbreak of COVID-19 in early 2020, the Fed flooded the credit markets with cash to avoid an economic collapse. That strategy worked extremely well, but the tradeoff was a big spike in inflation commencing during the second half of 2021.
In less than a year, we went from a zero interest rate policy (ZIRP) to the fastest increase ever in the fed funds rate. Consider this: in the summer of 2020, the yield on the 10-year Treasury note fell to nearly 0.5%. By the fall of 2021, it had risen above 4%. That has enormous implications not only for the bond market but for all other financial assets, too.
One of those consequences was a major stock market correction that saw the S&P 500 Index lose 25% of its value before bottoming out in October. Do you think it may fall even further in 2023?
No, I believe the worst is behind us as far as that goes. That does not necessarily mean that a roaring bull market is on the way, but the risk of a stock market crash is considerably less now than it was six months ago.
It’s no accident that the stock market bottomed out and started rallying at precisely the same time inflation started coming down. Despite the big rise in interest rates, consumers kept spending and the jobs market remained surprisingly strong. That’s the key to corporate profitability, since it is difficult to grow bottom-line profits while top-line revenue is shrinking.
One sector that performed quite well in 2022 despite the stock market correction were energy stocks, which as a group were up 65% in late November while all other S&P 500 industry groups were showing a loss. Will energy stocks continue to lead the market in 2023?
I don’t think so. Keep in mind, 2022 was an aberration for two reasons: the war in Ukraine disrupted global energy supply chains thereby …….