1) So much for the extreme volatility some market watchers expected following the United States inflation figures, which came in slightly lower than expected.
The S&P 500 Index (SP: .INX) rose a modest 0.73% whilst the Nasdaq Composite (NASDAQ: .IXIC) index gained just over 1%. The ASX 200 is making headway in afternoon trade on Wednesday, with Block (ASX: SQ2) shares the biggest gainer, up 8.3%, but still down 41% over the past 12 months.
The softer-than-expected US inflation print gives the green light to US Federal Reserve chair Jerome Powell to raise interest rates by 50 basis points overnight Wednesday.
The main game in town now for stock market watchers is predicting the terminal interest rate and when the Fed will start cutting interest rates.
Quoted on Bloomberg, Jason Katz, managing director and private wealth adviser at UBS, expects interest rates will stay higher for longer.
If they cut rates in the latter part of next year, that's going to be because they broke things along the way and things are ugly. So it's our view that the terminal rate lands anywhere between 5%-5.25% and remains there for the full calendar year.
Such an outcome would likely continue to put pressure on global stock markets, certainly for the first half of next year. Although the ASX 200 has had a good year, certainly when compared to the double-digit losses widely seen on Wall Street, you'd imagine there would be some comeuppance should US markets continue to fall.
2) Of course, not everyone shares the same views as Jason Katz – the divergence of opinion and thoughts is what makes a market.
"The coming year for investing may turn out to be better than many expect for stocks even though a recession appears likely," pros at Natixis Investment Management said Wednesday on MarketWatch.
"I'm bullish because everybody is bearish," said Jack Janasiewicz, portfolio manager and lead portfolio strategist at Natixis Investment Management Solutions. "The downside is already reflected in the market."
Simple is often best, especially given how hard it is to predict what might happen to the economy, to the consumer, to interest rates, to unemployment, to inflation, and more.
3) Writing in their November monthly update, the Surrey Australian Equities Fund said they "are positive on the outlook for Australian equities over the medium term".
Our view remains that inflation has been materially impacted by supply chain issues and as these normalise and higher interest rates take effect, inflation could ease and with it the recent sharpness of interest rate increases… Should rates increases start to slow and the US 10-year bond yield settles, we are positive on equity valuations.
The fund also notes, when it comes to small-cap stocks, positive recoveries often follow down years.
In 2022, huge gains in resources stocks have helped offset massive losses in growth stocks, such that the S&P/ASX Small Ordinaries Index (ASX: XSO) is down "only" 19% so far this year. Adopting the simple technique of being bullish because everyone else is bearish, I'd guess a basket of beaten-down small-cap growth stocks will outperform in 2023.
I own more than my fair share of small-cap "dogs of 2022", although thankfully I haven't owned them all year, somewhat limiting my losses.
Moving into 2023, I'm holding out recovery hopes for these dogs, with their one-year share price performance noted. In alphabetical order…
BlueBet Holdings Ltd (ASX: BBT) – down 73%
Field Solutions Holdings Ltd (ASX: FSG) – down 51%
Marley Spoon (ASX: MMM) – down 81%
Plenti Group Ltd (ASX: PLT) – down 64%
RPM Automotive Group Ltd (ASX: RPM) – down 44%
Swoop Holdings Ltd (ASX: SWP) – down 77%
Hydration Pharmaceuticals Co Ltd (ASX: HPC) – down 72%
Touch Ventures Ltd (ASX: TVL) – down 64%
It's a motley group of companies, with little in common, apart from the devastating falls experienced by shareholders over the past 12 months.
That said, apart from Touch Ventures, which is an investment vehicle trading at a significant discount to its net asset value, they are all growing quickly, mostly have cash or little to no debt, and are either profitable or trade around break-even.
Here's hoping for a happier 2023 and beyond for these dogs, and to the micro-cap (and fun but risky, so please don't try this at home) portion of my portfolio. I look forward to reporting back on progress come this time next year.
