1) It's turning out to be a tough day for the S&P/ASX 200 Index (ASX: XJO), down 92 points or 1.2% in early afternoon Wednesday trade.

The big four banks are doing most of the damage, coming after Commonwealth Bank of Australia (ASX: CBA) reported first half results. More on that below.

The biggest faller in the ASX 200 is the Corporate Travel Management Ltd (ASX: CTD) share price, down 8% to $15.86 despite guiding to a record full-year profit and saying "travel demand remains strong with no signs of macroeconomic factors impacting the recovery". 

Based on the share price reaction, the market sees things differently. Corporate Travel Management shares have plunged 38% from their 52-week high despite a very strong travel recovery. Animal spirits and speculation may have seen Corporate Travel Management shares previously get ahead of themselves. Investing can be tough. 

2) Tough crowd these stock market investors, with the Commonwealth Bank of Australia share price falling 6.1% despite it reporting a 9% lift in cash profit and a hefty 20% hike in its interim dividend.

According to the Australian Financial Review, investment bank Barrenjoey "has warned analysts are likely to downgrade profit margin forecasts for CBA after its net interest margin – as a key measure of profitability – peaked in October".

"Given CBA is trading on 19x P/E, we expect the shares to be soft today."

I've been wrong on CBA shares for as long as I can remember. More recently, in August last year, with the CBA share price trading around $100, I said it looked "downright expensive".

That didn't stop CBA shares recently hitting an all time high of $111, although with the CBA share price now trading at around $102 after today's sell-off, and Barenjoey calling out the high valuation, I feel a fraction closer to the mark.

Putting the CBA results to one side, from a "Team Australia" perspective, it was heartening to see CEO Matt Comyn say consumer spend is remaining resilient, with the bank remaining optimistic that a soft landing for the Australian economy can be achieved.

3) This is in stark contrast to outspoken columnist Christopher Joye who, writing in the AFR, recently said "in their quest to crush inflation, central bankers are going to crush everything".

Joye says the number one focus of central bankers is demand destruction as they are singularly committed to creating job losses to reduce elevated wage growth.

"The bottom line is that this is bad news for everything except cash. It means lower earnings and income growth, deeper economic retrenchments, and lower valuations as the risk-free hurdle rates inexorably rise. It means the coming default cycle is probably going to be the worst we have seen since the 1991 recession, which will be terrible for anyone who has lent money to risky borrowers or invested in junk debt."

This is hardly the stuff of soft landings.

So who is right? CBA or C Joye?

I have no idea. The optimist in me struggles to think we're heading for a deep recession. Like CBA, I see consumers still spending and restaurants still busy. The unemployment rate remains hovering near half-century lows at just 3.5%.

Yet storm clouds are ahead. 

With the Reserve Bank of Australia's latest cash rate hike, which marks the ninth increase since May, households are preparing themselves for increased mortgage repayments.

Consumer confidence has plummeted, sinking to its lowest levels since the early days of the pandemic. 

The AFR reports today that TD Securities is tipping the Reserve Bank of Australia to take its terminal rate to 4.35%, a full 100 basis points – or four more lots of 25 basis point hikes – ahead of the current cash rate of 3.35%.

That just might "crush everything," including CBA's prediction of a soft landing.

4) Meanwhile, at Wesfarmers Ltd (ASX: WES), consumers are continuing to spend up, with sales at value-orientated retailers Kmart and Target up an impressive 24% for the first half of FY23. Wesfarmers also reported sales growth at Bunnings and Officeworks, albeit more modest single-digit percentage gains. 

In aggregate, the conglomerate reported profits up 14% and increased its interim fully franked dividend by 10% to 88 cents per share. 

Like others, they see the storm clouds ahead, although Wesfarmers says its "strong value credentials and low-cost operating models mean they are well positioned to meet changing customer demand as customers adjust to cost pressures".

On a day when the ASX 200 is taking it on the chin, the Wesfarmers share price is up 1% to $49.20 where it trades on around 23 times forecast earnings and on a forecast fully franked dividend yield of 3.7%. 

Like a number of high-quality ASX blue chips, Wesfarmers shares are still trading on a valuation that's appropriate for a lower interest rate environment. 

If TD Securities is right and the RBA cash rate gets as high as 4.35%, by comparison to Wesfarmers shares, cash in the bank will look very attractive. 

It's hard to see Wesfarmers shares being "crushed" but the risks might be more skewed to the downside. A re-rating to a forward P/E of 20 times implies a Wesfarmers share price of $43.50. 

5) One stock whose valuation continues to defy conventional logic is healthcare imaging software company Pro Medicus Limited (ASX: PME). 

The company reported solid first-half revenue growth, up 28% to $57 million, with net profit up 32% to $27 million.

Pro Medicus has been winning long-term contracts with US healthcare companies. Such a high level of recurring revenue, coupled with clear operating leverage as demonstrated by a near 50% net profit margin, would deservedly translate to a premium valuation for Pro Medicus. The company is debt-free and sits on cash reserves and other financial assets of $94.5 million.

For a company with around $100 million of annual sales, Pro Medicus sports an eye-watering market capitalisation of $6.73 billion. It trades on roughly 116 times forecast earnings. 

If Pro Medicus grew profits at 25% per year for the next five years – no mean feat – my back of the envelope calculations would have Pro Medicus shares trading at 32 times earnings, something far more palatable and arguably reasonable at that stage. 

In effect, growth for the next five years could arguably already be priced into Pro Medicus shares. 

Despite all that, I still hold the shares. It's a risk I'm willing to take for one of the highest-quality companies trading on the ASX. 

As investing legend, 99-year-old Charlie Munger has once said…

"The first rule of compounding: Never interrupt it unnecessarily."

Pro Medicus is a core holding of the Hyperion Small Growth Companies Fund. Its stated philosophy is…

"The highest proven quality businesses with the strongest competitive advantages and organic growth opportunities produce superior shareholder returns over the long term."

Whilst I hope to hold Pro Medicus shares for many years to come, I realise I'm unlikely to see the huge gains I've seen since first buying the shares at just $1.50. 

The post ASX 200 in freefall as CBA's prediction of a soft landing might have just been torpedoed by huge interest rate call appeared first on The Motley Fool Australia.

More reading

• Why I think CBA shares are a top buy with $5,000
• How I'd invest $15,000 in ASX shares right now
• $2,000 to invest? 3 ASX shares to consider today
• How to invest $300 a month in Australian shares to target a $50,000 annual second income
• Why is everyone selling Wesfarmers shares?

Motley Fool contributor Bruce Jackson has positions in Pro Medicus. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Pro Medicus. The Motley Fool Australia has positions in and has recommended Pro Medicus and Wesfarmers. The Motley Fool Australia has recommended Corporate Travel Management. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

That's the good news. The not-as-good news is that doesn't mean we're headed straight into a bull market, according to an article on MarketWatch. 

"The bear market is over, but it is not the great reflation," said Wells Fargo equity analysts, led by Christopher Harvey, in a research note Monday. "We see neither a bull nor a bear market, just a market."

Wells Fargo "envision a malaise, not a hard landing" for the economy. "However, this does not necessarily mean it is risk-on from here on out," they cautioned. "A sustained re-pricing of risk is not supported by valuations or anemic economic growth expectations."

The same could be said about the Australian stock market, especially after the ASX 200 rally to start the new year, the benchmark index up close to 6% so far in 2023.

Some of the big winners this year have been more speculative stocks, like Nuix Limited (ASX: NXL) and Appen Limited (ASX: APX). 

But yesterday they both came crashing back to earth.

The Nuix share price slumped 26% after the AFR reported corporate regulator ASIC is expected to dump Nuix when it chooses its software partner late next month, as concerns rise over the troubled tech stock's cash burn and a wave of client defections.

The Appen share price plunged 15% after it said it expects to recognise a $204 million impairment charge relating to poor performance in its new markets division, excluding China.

Call it momentum trading, bottom fishing, fear of missing out (FOMO), or just plain gambling, but speculating on turnarounds for under-performing businesses often comes with a sting in the tail. 

2) Leading global fund manager Ophir characterised January's stock market rally as a "dash for trash", where low-quality stocks rallied hard.

Writing in its January letter to investors, Ophir said some stocks rallied despite no earnings news, and simply because of sentiment that inflation may be tamed, with the US market being led higher "by some of the lowest-quality, unprofitable and highly geared businesses".

"We expect to underperform during a low-quality rally in shares. It is not something that we want to chase. Sticking to your knitting is crucial as an investor as there are constant temptations to stray into the latest flavour of the month market segment through fear of missing out (FOMO)."

Ophir remains cautious for the middle and latter parts of this year, saying…

• "Interest rate hikes in major economies will continue to eat into demand, and corporate earnings may have further to fall. The size of any drop in demand and earnings, though, is highly uncertain."
  
• "Both a soft and hard landing are plausible outcomes."
  
• "In our view, the probability of more significant earnings falls is still higher than usual."

As for Ophir's edge, in the medium to long term, earnings growth drives share prices.

"With enough time and patience, and with no key changes in our investment team and process, we remain confident we can keep picking a higher proportion of earnings 'beats' than the market, which we believe will help drive long-term outperformance of our funds."

3) It can be a long and lonely time waiting for earnings growth to be recognised by the market, especially in the smaller and less liquid ASX stocks. 

In mid-2021, I bought shares in Duratec Limited (ASX: DUR), a leading Australian contractor providing assessment, protection, remediation, and refurbishment services to a broad range of assets and infrastructure. 

Whilst the company did endure some challenges imposed by COVID-19, it steadily and methodically grew revenue and its order book, the latter giving solid visibility into future earnings growth.

Yet the Duratec share price stagnated for 15 months. Doubts crept in. Boredom set in, and the temptation to sell and recycle the funds into something else. Was I missing something?

Then, somewhat suddenly, Duratec shares sprung to life.

A strategic acquisition, forecast FY23 revenue growth of 40%, and EBITDA growth of 73%, plus a string of contract wins has seen the Duratec share price jump to 77 cents, up 100% in the past six months. 

It's a win for the maxim that earnings growth drives share prices, in the medium to long term. Trading at around 0.4 times sales and around 5.6 times EBITDA, I remain a happy holder.

4) It doesn't always work out that well for my small and micro-cap portfolio.

I'm underwater on my Good Drinks Australia (ASX: GDA) holding, with the share price of one of the country's largest independent brewers trading at close to a 52-week low.

This comes despite the company having posted first-half revenue growth of 80%, albeit EBITDA coming in flat at $6.1 million as the company continued to invest in marketing for growth. 

Giving hope for long-suffering shareholders like me is the Good Drinks Australia target of growing its earnings to $25 to $30 million by FY25. By comparison, the market capitalisation today is just $85 million. The upside potential looks attractive.

Before it gets there, however, the company itself recognises it will have to carefully navigate an environment of reduced discretionary spend across the liquor category over the next 18 months. 

In September last year, the Good Drinks Australia Board and senior management team spent $3.2 million buying shares in their own company, paying 75 cents per share. 

"This significant level of financial commitment by the Board and management team reflects a shared belief in the attractiveness of the Company's valuation at these prices," said Chairman Ian Olson. 

Today, the Good Drinks Australia share price languishes at just 66 cents. Should the company hit its FY25 EBITDA target, the GDA share price should indeed turn out to be attractive both at 66 cents and 75 cents. But it's a competitive market, and premium-priced craft beer may struggle to sell once the "mortgage cliff" hits households. 

I continue to hold my GDA shares, may add, but will mostly just wait, and hope. 

5) The market is shooting first and asking questions later with Temple & Webster (ASX: TPW). The share price of the online furniture and homewares retailer is being taken to the cleaners, currently down 26.67% to $3.63.

Revenue for the first half declined 12% to $207 million, with the company reporting a rather skinny net profit after tax of just $3.9 million. That's a lot of sales, logistics, marketing, and investments for a tiny return. Compounding things was a decline in active customers to 840,000.

For the first five weeks of the second half, Temple and Webster sales were down 7% over the prior corresponding period, although this has been blamed on strong sales a year earlier due to the omicron outbreak.

Looking ahead, Temple & Webster's CEO, Mark Coulter says…

"Longer-term, ecommerce in the Australian furniture & homewares category remains highly under-penetrated, and we have a much larger addressable market to go after in our new target verticals."

Retailing is tough. Competitive, cyclical, and with skinny margins. I'll wish them the best from the sidelines, and wait for the headwinds to turn to tailwinds. It might take some time.

The post Dash for trash fades as earnings cliff looms for ASX shares, with the market shooting first and asking questions later appeared first on The Motley Fool Australia.

More reading

• 3 beaten-down ASX shares that I think could rebound strongly
• How to invest during an ASX share bear market when you're worried about prices falling more
• Here are the top 10 ASX 200 shares today
• Why I'd buy dirt-cheap ASX shares now and aim to hold them for a decade
• Up 109% since November, are Appen shares still a buy today?

Motley Fool contributor Bruce Jackson has positions in Duratec and Good Drinks Australia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Appen and Temple & Webster Group. The Motley Fool Australia has recommended Temple & Webster Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

1) Interest rates and central bankers are back on centre stage.

Yesterday, the RBA hiked interest rates by 25 basis points to 3.35%, with governor Philip Lowe saying "further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary".

That sent the ASX 200 into negative territory as traders priced in the risk of a higher terminal interest rate, and interest rates staying higher for longer.

According to the Australian Financial Review, Commonwealth Bank head of Australian economics Gareth Aird had been expecting the RBA to pause at 3.35%. On Tuesday, he was forced to revise that figure higher to 3.85%, implying two more increases.

The same publication quotes head of market economics at National Australia Bank Tapas Strickland as saying there is now a risk the RBA could increase the cash rates as high as 4.1%.

Earning around 4% on your money, risk-free in a savings account, looks a better bet than investing in a number of ASX blue chips, including…

Source: S&P Capital IQ. Earnings yield is the inverse of the price-to-earnings (P/E) ratio.

Just like tech stock investors ignored valuation as they bid market darlings up to the moon, so are blue chip investors buying at today's elevated prices. 

Any resulting pain won't see share prices of these popular ASX shares plunge 50% or more – these are profitable, dividend-paying companies with sustainable competitive advantages – but the risk is definitely to the downside, especially as the economy slows and interest rates keep edging higher.

2) So if it's not industrial blue chips, where does an Aussie investor plonk their cash?

According to the AFR, although commodity prices broadly have eased from their June 2022 highs, they are still higher than at any stage since 2014, helping propel local resources stocks.

"A combination of supply discipline, China reflating and emerging from their COVID-zero policy and elevated cost pressures suggests strong commodity prices are likely to remain," says Todd Hoare, head of public markets at LGT Crestone.

By contrast to the above valuations, blue chip resources stocks look positively cheap, with BHP Group (ASX: BHP) shares trading on an earnings yield of 12% and a dividend yield of 9.8%. Fellow mining giant Rio Tinto (ASX: RIO) shares trade on an earnings yield of 14.8% and a dividend yield of 9.5%.

Resources shares are notoriously cyclical, something that is reflected in the very modest valuations of those two mining giants. As to whether that still means they are incredible value… well, that's not a game in which I have an edge, nor one I have a desire to play. 

3) Back to interest rates and central bankers…

Overnight in the US, Federal Reserve chief Jerome Powell stuck to his script that US interest rates would need to go higher as the fight against inflation carries on.

Markets initially fell, then rallied strongly as traders – perhaps clutching at straws – noted Powell had the chance to signal he'd be more aggressive in hiking interest rates, but didn't take it.

The tech-heavy Nasdaq Composite jumped 1.9% higher, putting it close to bull market territory. How quickly things can change from bear to bull.

It was only yesterday when the focus was on corporate earnings, and not interest rates, inflation, and sentiment. 

As results continue to roll in for US and Australian companies, I fully expect the focus to return to earnings, particularly outlook statements.

Speaking of which…

In the US, the Chipotle Mexican Grill (NYSE: CMG) share price is down 5% in after-hours trade after the popular burrito restaurant chain said higher costs associated with labour cut into its profit in its most recent quarter, while sales were depressed during the holidays.

Here in Australia, the Amcor PLC (ASX: AMC) share price is down 3.4% after the packaging company gave a more cautious near-term outlook, saying it saw softening in demand for its consumer staples and healthcare end markets and customer destocking through the December quarter.

Earnings season really hots up next week, with JB Hi-Fi (ASX: JBH) – somewhat of a bellwether for consumer discretionary goods – reporting on Monday. 

JB Hi-Fi shares are cheap, trading on an earnings yield of 10% and a dividend yield of 6.6%. We'll find out Monday whether they are cheap for good reason. 

4) In its statement accompanying the RBA's monthly meeting, the Board recognised "monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments".

Today we have somewhat conflicting opinions on talk of a mortgage cliff as fixed-rate housing loans at around 3% roll over into the new standard variable rate of around 6%.

No doubt talking her own book, Australian Banking Association chief executive Anna Bligh said there was a minority of people who were "very stretched" with repayments and that many homeowners had considerable savings buffers, according to the AFR.

"For those people who find it really tough, banks are not going to be sitting there watching people fall off a cliff. They are already working with some of those customers to make different arrangements so that they can get through this period of high-interest rates and get through until interest rates start to stabilise and come down.

"It is in banks' commercial interest to keep people in their homes and get them to keep them there until they've paid off the loan in 25 years' time."

On the other hand, ANZ Bank chief executive Shayne Elliott says a recession in Australia is possible but not likely, and that households are in for a "period of pain" now that the buffer built into mortgage loans has gone, also according to the AFR.

Quoting an interview on 3AW radio, Elliott said "we are at a very difficult pivot point".

"Up to now people have been managing OK… but it's really from here on it gets very difficult because we are over that buffer, and it starts to really bite into people's savings." 

It might be no coincidence that ANZ shares are by far the cheapest of the big four banks, although I'd imagine if one big bank is bracing itself for headwinds, the three others will be too.

The post With interest rates heading higher again, the risk is to the downside for these popular blue chip ASX shares appeared first on The Motley Fool Australia.

More reading

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• 3 ASX blue chips I'd buy for a $250,000 retirement portfolio
• Why ASX dividend investing still works for building long-term wealth
• These ASX blue chips now look too cheap to ignore
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Motley Fool contributor Bruce Jackson has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended CSL and Chipotle Mexican Grill. The Motley Fool Australia has positions in and has recommended Amcor Plc, Coles Group, and Telstra Group. The Motley Fool Australia has recommended Chipotle Mexican Grill and Jb Hi-Fi. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

1) In the US, the soft landing versus recession debate continues, even as traders expect the terminal fed-funds interest rate to now peak at between 5% and 5.25%.

Goldman slashes US recession risk odds to 25 per cent, according to the AFR. 

"We have cut our subjective probability that the US economy will enter a recession in the next 12 months from 35 per cent to 25 per cent, less than half the 65 per cent consensus estimate in the latest Wall Street Journal survey," Goldman's chief economist Jan Hatzius said.

Labour markets remain tight both in the US and here in Australia, almost the exact opposite conditions that traditionally signal an imminent recession. Combined with a slowdown in the rate of inflation, and the goldilocks soft landing scenario is well and truly in play.

Last week, US federal reserve Chairman Jerome Powell said he continues to think there's a path to getting inflation back down to 2% without a really significant economic decline or a significant increase in unemployment.

No wonder equity markets have had a strong start to 2023. The S&P/ASX 200 Index (ASX: XJO) is within a whisker of its all time highs, and up over 7% so far this year. The S&P/ASX All Technology Index (ASX: XTX) is an even more impressive 12.7%, with Block Inc (ASX: SQ2) shares up over 30% since the start of the year.

2) Doomsayers are never far from the headlines, especially in the US, as epitomised by this headline on MarketWatch…

"Look for stocks to lose 30% from here, says strategist David Rosenberg. And don't even think about turning bullish until 2024."

The former chief North American economist at Merrill Lynch said the US recession is just starting, and that investors can expect to endure more uncertainty leading up to the time when the Federal Reserve first pauses its current run of interest rate hikes and then begins to cut.

Excerpt:

Fortunately for investors, the Fed's pause and perhaps even cuts will come in 2023, Rosenberg predicts. Unfortunately, he added, the S&P 500 Index (SP: .INX) could drop 30% from its current level before that happens. Said Rosenberg: "You're left with the S&P 500 bottoming out somewhere close to 2,900."

At that point, Rosenberg added, stocks will look attractive again. But that's a story for 2024.

I'd be taking the other side of that "30% drop" bet, not because I'm incredibly bullish, but because such falls are very rare, and more so coming after a year where the S&P 500 index sank almost 20%, with the tech heavy Nasdaq Composite Index (NASDAQ: .IXIC) tumbling 33%.

3) Here in Australia, according to the AFR, UBS equity strategist Richard Schellbach says share prices have rallied too hard, with the investment bank believing they're factoring in too much optimism.

"The reality is over the next six months we have the laggard impact of higher interest rates coming through, and fixed-rate mortgages getting priced higher and consumers starting to run down their savings significantly.

"Some of these profit results, which we think will be okay, are likely to see a muted share price reaction because prices have run up so hard, they've already factored in that earnings story."

It's not "the market is going to fall 30% rhetoric," but suggesting investors don't go all-on just because the ASX 200 has had a strong start to 2023. There's a long way to go… and that's just to get us to the end of February and this earnings season. 

4) Speaking of earnings season, growth is going to be hard to come by for a lot of companies as year on year comparisons are still impacted by abnormal COVID trading conditions in 2022.

Yesterday, Nick Scali Limited (ASX: NCK) reported a stunning 70% increase in first half profit on the back of record deliveries due to the large outstanding order bank at 30 June 2022. 

Yet despite January being the strongest trading month for the furniture retailer, and being better than the company's expectations, Nick Scali brand written wales orders were down 12% from January 2022.

The Nick Scali share price sank 13% yesterday, and is down another 3.9% today to $10.38. Despite being one of the highest quality retailers on the ASX, Nick Scali shares are now down 35% from its November 2021 high. 

Stock picking can be tough.

Based on consensus estimates, Nick Scali shares trade on a forecast FY24 earnings multiple of 11.5 times and fully franked dividend yield of 6.5%. The shares look good value on those numbers, but the coming "mortgage cliff" is the great unknown, with Nick Scali themselves saying "at this point it is difficult to provide further guidance" for the rest of this financial year.

5) As widely expected, the Reserve Bank of Australia have hiked interest rates by another 25 basis points, bringing the cash rate to 3.35%.

It's more good news for savers, with at-call savings accounts paying around 4% interest rates widely available. If you are not making your cash work hard for you, it's time to shop around for a better interest rate on your savings. 

While higher interest rates naturally slows the economy – and is soon to inflict some serious pain on mortgage-holders – the good news is that with each RBA monthly meeting, we're closer to peak interest rates for this cycle.

No longer will interest rates and inflation be the driver of share prices – 2023 will be all about earnings. 

Leading fund manager QVG Capital says it believes the job to be done in 2023 "is to own the relatively small number of companies run by motivated insiders that produce growing free cash flows."
The fund's top holdings include Hansen Technologies Limited (ASX: HSN), Johns Lyng Group Ltd (ASX: JLG) and Lovisa Holdings Ltd (ASX: LOV). 

The post ASX share prices have rallied too hard to start 2023 says UBS equity strategist as one US analyst says don't even think about turning bullish until 2024 appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has positions in Block. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Block, Hansen Technologies, Johns Lyng Group, and Lovisa. The Motley Fool Australia has positions in and has recommended Block. The Motley Fool Australia has recommended Johns Lyng Group and Lovisa. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

1) US markets closed out January with solid gains as, according to Bloomberg, "investors cheered signs of labour costs easing and inflation cooling."

"Data on Tuesday showed US housing prices continued to cool, while another report highlighted consumer confidence unexpectedly falling. Hanging over everything is Wednesday's Fed decision, with the central bank widely expected to raise rates by a quarter percentage point."

Marketwatch reported the Nasdaq Composite Index (NASDAQ: .IXIC) cemented its best January performance since it notched a 12.2% gain in 2001, while the S&P 500 Index (SP: .INX) booked its best start to a year since 2019, according to Dow Jones Market Data.

2) Here in Australia, the S&P/ASX 200 Index (ASX: XJO) ended January 6.2% higher, with the AFR reporting the one month rally in the stock market "entirely recouped last year's losses."

It's a salient reminder that if you miss the best few days or months – in a futile attempt to get in and out of the market with perfect timing – your returns are likely to lag that of the market.

Perhaps not surprisingly, two of the best performing ASX 200 stocks in January were lithium stocks, with the Sayona Mining Ltd (ASX: SYA) share price gaining 37% and the Pilbara Minerals Ltd (ASX: PLS) share price jumping 27% higher.

To my detriment, I've let the whole lithium stock boom pass me by, just as I steered clear of the whole cryptocurrency and NFT craze. Fear of missing out (FOMO) is not an investing strategy. I don't have the skills or frankly the interest in working out whether a lithium stock – and the lithium sector – will be a good investment or not.

3) In the AFR's Chanticleer column titled "Why bad news is good news for lithium stocks", author James Thomson quotes Macquarie as saying…

"Supply response will lag demand, resulting in a market deficit and elevated lithium prices. In addition, we believe the capex upgrades could also shift the cost curve upwards, translating to higher lithium prices in the long term."

Rising electric vehicle (EV) production is fuelling demand for lithium, and this is translating into the surging prices of lithium stocks, something at Thomson says "speaks in part to a return to the global burst of speculative bullishness, and in part to new data suggesting lithium demand over the next decade could be even stronger than expected."

A lot can change in a decade. History says there will be some big winners in the lithium space, and some will flame out. Good luck sorting the wheat from the chaff.

4) As ever, it takes two or more participants to make a market.

The bulls – buoyed by the great January – will point to inflation as having peaked, interest rates close to a peak, and corporate profits holding up. A soft economic landing could – somewhat amazingly given all we've been through since COVID first struck in early 2020 – see the stock market hit new highs this year.

The bears will point to inflation being a tough nut to crack, meaning interest rates will rise higher than current expectations, which in turn will see unemployment rise causing an inevitable recession. In effect, a hard landing. 

Good luck picking the winner. As an eternal optimist, I'm hoping the global economy will keep muddling through as it resets from the massive external shocks of COVID, Ukraine war, inflation and one of the sharpest pace of interest rate hikes on record. If markets can average a gain of 7 to 10% per annum over the next five years, I'll be content. 

On the other hand, noted bear Jeremy Grantham continues to warn investors of a potential 50% decline in the stock market this year as he believes valuations are still too high, according to a report on Markets Insider. 

As an asset manager, billionaire Grantham can't sit in cash waiting for the crash. Nor can he short the whole market, for the timing of any potential stock market crash is unknown. 

As for what Grantham is backing, Markets Insider quotes from his 2023 outlook letter…

"Despite the generally unattractive nature of the U.S. equity market and the extremely tricky global economy, there are still a surprising number of reasonable investment opportunities even if they are not sensational… emerging markets are reasonably priced and the value sector of emerging is cheap." 

Australia may not be an emerging market, but we aren't the US equity market. Writing on Livewire Markets, AMP Chief Economist Shane Oliver gives seven reasons why Australian shares are likely to outperform global shares over the medium term. Included are a new super cycle in commodities, population growth, higher dividends and a thawing in the China relationship.

Back to Grantham, who also says…

"For those with a longer horizon than average, say 5 years and above, I believe stocks related to addressing the problems of climate change and the increasing pressure on many raw materials have a substantial advantage over the rest of the economy as the world's governments and corporations begin to accept the urgency of these problems." 

Super cycle in commodities.

Climate change.

China.

Lithium stocks, anyone?

The post Jeremy Grantham just warned shares could crash 50%, but did he also suggest lithium stocks may have "a substantial advantage" over the long-term? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

1) After a difficult 2022, it has been a great start to the new calendar year for stock market investors, with the S&P/ASX 200 Index (ASX: XJO) up more than 6% in January.

US markets have been even stronger, especially the tech-heavy Nasdaq Composite (NASDAQ: .IXIC), up close to 10% to start 2023.

But the good times could be about to come to a screaming halt, with Morgan Stanley's Michael Wilson warning "the stock market's January rally could end this week".

Wilson says the January rally is "just another bear-market trap" as central banks in the US and here in Australia prepare to hike interest rates yet further as they attempt to tame inflation. 

2) It appears the ASX 200 index didn't get the Morgan Stanley memo, up a solid 0.46% to 7,516 in late morning trade on Tuesday. 

So much for the oncoming economic slowdown here in Australia — the ASX 200 is up almost 8% over the past 12 months. 

Perhaps it's like the Aussie consumer – we know there are some tough times ahead, especially for those with mortgages but also for renters – but damn it if we're not going to have some fun before reality bites.

The Woolworths Group Ltd (ASX: WOW) share price is up 2.6% to $35.66 on Tuesday, whereupon it trades on 26 times earnings and on a 2.6% fully franked dividend yield. I get the defensive nature of its earnings, but I'd rather take 4% in a savings account than risk my money on Woolworths shares at today's price. 

3) Stock winner of the day

Not many big winners to choose from today despite quarterly updates coming out faster than a Novak Djokovic serve.

The Moneyme Ltd (ASX: MME) share price is up 16% to 32.5 cents after the consumer money lender said it delivered record revenue and a statutory profit in Q2, "beating analyst expectations".

It's a welcome turnaround in the fortunes of the Moneyme share price, given it has fallen 83% in the past 12 months. Consumer lending faces some serious headwinds as the economy weakens, both from lower new loan originations and from higher defaults. As to whether that is already priced into Moneyme shares is anyone's guess, while acknowledging the company is managing to the current macro environment and is committed to driving profitable growth.

4) Stock loser(s) of the day

Unlike the winner's circle, we have plenty of losers to choose from for today's stock flops.

A trading update from former high-flyer BWX Ltd (ASX: BWX) was a shocker, with the owner of Sukin and other beauty and wellness products lowering revenue and profit guidance.

"We are revising our forecast on the basis of our cash-constrained environment having impacted our ability to trade effectively and led to a temporary increase in out of stocks and a need to reduce promotions to conserve cash and protect stock levels."

The BWX share price has fallen 93.5% in the past 12 months. Steer well clear of this fallen knife. 

I've long been mystified by the huge market capitalisation placed on Megaport Ltd (ASX: MP1) given its relatively modest size.

The "global leading provider of Elastic Interconnection services" said total revenue for the Q2 was $37 million, up 10% quarter on quarter, and delivered earnings before interest, tax, depreciation, and amortisation (EBITDA) profit for the quarter. Although revenue is sticky due to low customer churn, Megaport did note the "current economic uncertainty seems to be delaying customer decision making, lengthening sales cycles".

The Megaport share price is down 16% to $6.45 in Tuesday trading, and off 52% over the past 12 months. With a market capitalisation of $1 billion, even after today's fall, investors are being asked to pay a pretty price for a pretty modestly sized company. 

The Pointerra Ltd (ASX:3 DP) share price is on the nose today, down 17% to 19 cents, after the company that "helps customers answer almost any physical asset management question" said program delays by some US customers impacted invoicing in Q2.

The Pointerra share price went parabolic in early 2021, soaring at one stage over 30 times in value as investor enthusiasm went nuts. It's been mostly downhill since February 2021, with the Pointerra share price plunging 77% from those epic highs. 

The rubber now needs to hit the road for Pointerra, with investors no longer valuing the company on hope. With a cash balance of just $2.75 million and the most recent quarter showing operating outflow of almost $1 million, investors better hope the "expected rebound in Q3 and Q4" becomes a reality.

The post ASX 200 jumps higher again, defying predictions the 2023 stock market rally could be about to come to a screaming halt appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Megaport and Pointerra. The Motley Fool Australia has recommended Megaport and Pointerra. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

1) It has been a flying start for the ASX so far in 2023, with the AFR reporting the S&P/ASX 200 Index (ASX: XJO) is "off to the best start in at least 30 years."

Quite remarkably, given all we've been through over the past two "covid" years – particularly the pandemic itself, high inflation and sharply higher interest rates – the ASX 200 index is trading within a whisker of its all time highs.

It's in sharp contrast to the beatings handed out to growth shares, particularly in the US, with the Nasdaq Composite Index (NASDAQ: .IXIC) down over 16% in the last 12 months.

Australian investors can thank our lucky stars the ASX 200 index has a hefty weighting to commodities – particularly oil and coal – helping propel the Whitehaven Coal Ltd (ASX: WHC) share price 246% higher these past 12 months, with the Woodside Energy Group Ltd (ASX: WDS) share price 50% higher over the same period.

2) Most of the heavy lifting has already been done by central banks as they've undertaken one of the most aggressive periods of sustained interest rate hikes in history in the fight against rampant inflation.

All eyes now are on the economy, and whether the landing will be hard or soft.

So far so good for the optimists, with consumers continuing to spend even as they face sharply higher mortgage repayments as low fixed rate deals roll off this year and next.

A trading update from shoe retailer Accent Group Ltd (ASX: AX1) said "trade has continued to be strong through November and December" with sales above expectations. Admittedly against softer "covid" trade last year, Accent total sales are up 39% for FY23, a stunning performance for a somewhat discretionary retailer.

Not surprisingly, the Accent Group share price is up 9% to $2.09 in Wednesday morning trade. Accent shares trade at around 15 times forward earnings and on a forecast fully franked dividend yield of around 5%… not cheap if consumers start putting their hands in their pockets later this year. 

3) Consumer behaviour has me baffled. Given the coming interest rate shock, given consumer confidence is deeply pessimistic and given the falling house prices, I'd have thought people would be battening down the hatches, preparing for tough times ahead.

But no. Revenge spending post covid carries on, not this time on the stock market and online shopping, but on shoes, restaurants and travel. 

With most working-age Australians never having experienced a "proper" recession, coupled with low unemployment and a high savings rate, consumers are partying now and worrying about tomorrow when it comes. 

Helping too are superannuation balances, hardly moved for many Australians despite the macroeconomic ructions felt here and around the world. 

She'll be right mate.

4) Before today, some economists were predicting/hoping the Reserve Bank of Australia would hold interest rates at the upcoming February meeting. 

Deloitte Access Economics said there is an "everest of evidence" to suggest that the Reserve Bank should hold the rate next month.

"Australia's consumer-led recovery is rapidly running out of road, with the combination of falling house prices, rising interest rates, high inflation, low levels of consumer confidence, and negative real wage growth expected to combine to see spending growth decelerate markedly over coming months," said Deloitte's Stephen Smith on Investor Daily. 

Just like I was saying…

Except, today's inflation print came in hot after headline inflation of 7.8%, comfortably ahead of expectations.

Cue the ASX 200 index going into a sharp reverse and Australian bond yields spiking higher. Cue also a locked-in 25 basis point rise in the cash rate in February. 

Inflation is not done with yet. 

Just when you thought we're through the worst, there could be pain ahead for equity investors, and more pain for interest-rate sensitive growth shares.

5) Speaking of pain, uber-bear Jeremy Granthan is quoted on Bloomberg as saying the popping of the bubble in US stocks is far from over and investors shouldn't get too excited about a strong start to the year for the market.

The 84-year old money manager says the S&P 500 Index (SP: .INX) could decline as much as 20% from current levels, adding…

"There are more things that can go wrong than there are that can go right. There's a definite chance that things could go wrong and that we could have basically the system start to go completely wrong on a global basis."

According to one poster on Twitter, the last time Jeremy Grantham was bullish was 2009 and by January 2010 he was already calling the market a bubble. 

The post Consumer spending defies logic as inflation rages higher, locking in yet another interest rate hike in February appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Accent Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

1) It has been a brutal year for those of us invested in growth and/or small cap stocks, with sharply rising interest rates having the effect of sending share prices of many such companies down 50% or more.

And the fight against inflation is not over yet, with central banks around the world still tightening, hoping to pull off a miracle soft landing, but more likely sending many economies into recession.

The narrative is shifting from questioning how high interest rates need to rise, and when central banks will pivot to lowering them, to predicting the severity and duration of the economic downturn. 

"Wall Street's 2023 profit decline could rival GFC," says the headline in the AFR, with Michael Wilson, Morgan Stanley's chief US equity strategist, saying the earnings recession could be similar to what transpired in 2008-09.

Based on its bearish earnings forecast, the investment bank is suggesting US equities could plunge more than 20% from current levels. Thankfully, "Morgan Stanley does not see signs of distress in the housing market or systemic financial risk, meaning it does not expect 50 per cent downside for shares, as seen in 2008," according to the AFR article.

"The fixation on inflation and the Fed continues, but markets appear to have moved past it and onto the real concern – earnings growth/recession," Mr Wilson said. "Rates and inflation may have peaked, but we see that as a warning sign for profitability."

2) Right on cue, enter plus size retailer, City Chic Collective Ltd (ASX: CCX) which today warned of continued volatile trading, with overall demand below expectations.

In response, City Chic has increased its promotional activity to drive demand, resulting in further gross margin compression. The company now expects to report a small underlying EBITDA loss in the first half, a half that encompasses the peak Black Friday and Christmas trading periods. Or should that be Red Friday, given Black Friday is thought to derive its name from the day when retailers go from losses to profits in the trading year?

The City Chic share price has taken yet another bath today, down 22% to 46 cents, and is now down 91% in the past 12 months.

Buying a falling knife – like City Chic – is fraught with danger. Profit warnings often come in threes, and turnarounds either don't turnaround, or can take longer than expected to recover.

It appears the Spheria Asset Management Australian Microcap Fund has been on the wrong side of the City Chic trade – so far at least – given comments in its November monthly update…

"We believe the share price fall has created an opportunity to buy a business at a significant discount to our view of its intrinsic value. The core driver of their earnings continues to be their Australian City Chic store business. Given the share price weakness you are buying the Australian business for ~5x normalised EBIT with potentially more upside for profit turnarounds at its international online businesses – Avenue (US based) and Evans (UK based)."

Stock picking – especially in this economic environment – is tough, especially in the retail sector. Consumers' willingness to spend on discretionary items is clearly going to deteriorate in 2023 as higher interest rates eventually take their toll. 

Beware the falling knife.

3) Coal, lithium and energy stocks have helped the S&P/ASX 200 Index (ASX: XJO) avoid the big falls seen on US markets, the Whitehaven Coal Ltd (ASX: WHC) share price taking the gold medal for the biggest gain in 2022, up over 300%, showing coal demand to be anything but in terminal decline.

Also helping prop up the ASX 200 index have been three out of the four big bank shares, with Westpac Banking Corp (ASX: WBC) shares up 8.9%, National Australia Bank (ASX: NAB) shares up 4.9% and Commonwealth Bank of Australia (ASX: CBA) shares up 4.6%. The odd bank out is Australia and New Zealand Banking Group Ltd (ASX: ANZ) shares down 13.8% so far in 2022.

Beloved for their full franked dividends, bank shares also prop up many self managed super funds, helping deliver a solid year for many retirees. 

As thoughts turn to 2023, a year of falling house prices and subdued consumer confidence – and with them, lower lending demand and higher default rates – the premium valuation afforded CBA shares leaves little downside protection. 

Even the famed CBA fully franked dividend is not looking overly attractive, yielding just 3.6%, about the same as you can earn risk-free in a bank savings account. 

CBA shares are not the only popular blue chip stock trading on a premium valuation. According to S&P Capital IQ, Telstra Group Ltd (ASX: TLS) shares trade on 28 times earnings and Woolworths Group Ltd (ASX: WOW) shares trade on 27 times earnings. 

Put another way, that's an earnings yield for both stocks of about 3.5%, a rating that might make sense when interest rates are at close to zero, but leaves little downside protection with the RBA cash rate likely headed to 3.6% before Easter. 

Retirees looking to preserve capital whilst banking fully franked dividends from popular blue chip stocks might be looking at a much tougher 2023.

The post Little downside protection for popular ASX 200 shares as 2023 looms a much tougher year for blue chip stocks appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool Australia has recommended Westpac Banking. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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. 

The post "Bullish because everybody is bearish" – here are 8 dogs of 2022 I'm backing for the win in 2023  appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has positions in Block, BlueBet, Field Solutions, Hydration Pharmaceuticals, Marley Spoon Ag, Plenti Group, Rpm Automotive Group, Swoop, and Touch Ventures. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Block and Marley Spoon Ag. The Motley Fool Australia has positions in and has recommended Block. The Motley Fool Australia has recommended BlueBet and Marley Spoon Ag. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

1) The S&P/ASX 200 Index (ASX: XJO) is trading higher on Tuesday following the positive lead on Wall Street, where the S&P 500 rose 1.4%, with the tech-heavy Nasdaq also up a healthy 1.3%.

Tomorrow sees the US consumer price index reading which is expected to show inflation continues to fall, something that would see the Federal Reserve 'only' hike the interest rate 50 basis points higher on Wednesday.

A soft inflation print has equity watchers on high alert, given the S&P 500 roared 5.5% after November's headline inflation figure came in lower than expected.

In a rather heroic extrapolation, analysis from market maker Optiver suggested the US equity benchmark could again rise as much as 5.5% on Tuesday (US time) should headline inflation come in 0.2 percentage points below estimates on a year-over-year basis, according to Bloomberg. 

The stock market is on high alert for a strong move either way, as evidenced by the VIX – a measure of volatility – jumping 9.5% higher in US trading on Monday despite equity markets also rising. The two gauges usually move in opposite directions.

2) The Tesla (NASDAQ: TSLA) share price bucked the trend in US trading on Monday, slumping another 6.3% to $167.82, its lowest close since August 2020. 

A favourite amongst retail investors, Tesla shares are now down 58% so far in 2022, contributing towards what JP Morgan estimates is a 38% loss for US retail traders this year. 

Gone is the "buy the dip" mantra, replaced by "sell before it's too late." Those that rode Tesla shares from around $35 to over $400 might be locking in profits, while those that jumped on late in the game might be booking tax losses, or even bailing out of the stock market altogether.

"The losses this year were unprecedented, especially for the younger generation of investors," said Giacomo Pierantoni, the head of data at Vanda in Singapore on Bloomberg. Whether they keep ploughing money into the market — buying the dip, as they say — or lose faith in investing and give up altogether could help determine their ability to retire in the coming decades.

3) Regardless of the fate of Tesla stock – I have no position – I do hope the many retail investors who have been dealt a tough investing lesson these past 18 months don't give up on the stock market, especially now that many popular COVID stocks have seen their share price cut in half, or more.

The stock market offers ordinary folk like you and me the opportunity to earn outsize returns, for very little effort. Invest regularly, ideally every month, into a low-cost index-tracking ETF like the Vanguard MSCI Index International Shares ETF (ASX: VGS) and, over time, you could return around 8% per annum, something that would roughly double your money every nine years.

All you need to do is resist any temptation to sell out during the inevitable periods of volatility, like we've been experiencing these past 18-odd months.

The above-mentioned data compiled by Vanda suggests US retail investors have collectively lost $US350 billion this year "as big bets on risky stocks and former high-fliers like Tesla Inc. backfired for the mom-and-pop set".

If that's you – and my growth-heavy portfolio has shed some serious blood this year – I urge you to stay the distance and make a lifelong commitment to investing in the stock market.

You may need to give up individual stock picking – you'll get some winners but you'll also need to handle the losses and your emotions when you are inevitably wrong – but you should be able to enjoy outsized returns by investing in one or more low-cost ETFs, like the one mentioned above.

4) As if to emphasise how difficult stock picking can be, especially in this current economic environment, take these two conflicting reports in the AFR today…

1. Tech stocks set for rebound after a 'nightmare' year, according to Wedbush Securities.

"We believe overall the tech sector will be up roughly 20 per cent in 2023 from current levels with big tech, software, and semis leading the charge despite the macro and Fed wild cards abound."

2. Goldman warns of 'a clear capitulation' in equities.

"A shift from inflation to growth concerns (i.e. a transition from rates to growth volatility) may trigger a clear capitulation from investors into next year."

So which is it to be?

I have no idea. As ever, as an optimist, and a lifelong stock market investor (albeit I started quite late, at the age of 24), I'm hoping 2023 will deliver a positive overall return, notwithstanding continued heightened volatility. 

My simple plan, one that should see me into retirement and well beyond…

Stay invested. Keep investing. Add regularly. Ignore near-term volatility. Live happily ever after. 

The post This simple investing plan could save the retirement plans of millions of retail investors appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Vanguard MSCI Index International Shares ETF. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

1) The stock market continues to dance to the tune of interest rates, with the S&P 500 falling 0.7% on Friday night as investors bet on central banks staying "higher for longer" as they continue to battle stubbornly higher inflation.

"We think the markets are too sanguine on rates after the first quarter," said Cliff Hodge, chief investment officer for Cornerstone Wealth on AFR.

The Federal Reserve meets this week, and is widely expected to hike US interest rates by another 50 basis points. Such a move would lift rates to a 4.25% to 4.5% target range, the highest level since 2007. Good news for savers. Bad news for the economy and share market investors, although much of the coming downturn is arguably already priced into many individual stocks.

2) The market will turn higher in anticipation of better economic news, be that lower inflation and/or central banks pivoting to hold or even cut interest rates in the latter half of next year.

I do not profess to having any great insights or opinion as to what may happen and when, other than to say – stating the obvious – we're much closer to the end of this rate hiking cycle than the start.

Writing in its November monthly update, New Zealand based Pie Funds are "fairly optimistic about the outlook for 2023," partly because they believe inflation and interest rates have peaked, but mostly because "after such a terrible year history shows poor-performing periods are usually followed by strong returns if you look out 12 months."

I love the simplicity of the thinking. No macro. No talk of soft landing versus deep recession. And it comes despite Pie Funds saying a widely expected general economic slowdown or recession "will impact corporate profits, on average, anywhere from 10-40%."

"Based on 15 years of managing client money, I know that investors won't start to return to stocks until at least six months after the bottom. So that means investor sentiment will remain cautious until at least April," said Mike Taylor, founder and chief investment officer.

3) One of Pie's holdings is little-known IPD Group Ltd (ASX: IPG), a national distributor and service provider to the Australian electrical market.

It is one of the few recent IPOs that is trading strongly above its float price, the IPD share price having risen from $1.20 to its current $2.93 in the 12 months since it hit the ASX boards.

"IPD Group held its AGM during the month and confirmed that strong double-digit growth has continued into 1H23 while margins have been maintained. IPD Group exemplifies the style of defensive growth business we look for with structural tailwinds in electrification, market share opportunities as they expand their portfolio of ABB products, and high levels of ownership by management," wrote Pie's Australiasian Growth Fund portfolio manager Michael Goltsman. 

4) There have been many COVID winners turned losers, most obviously in the tech sector. 

You can take your pick as the poster child for the huge round trip some of these stocks have endured, and just how much their share prices have fallen over the past 12 months…

Zip Co Ltd (ASX: ZIP) share price down 86%

PointsBet Holdings Ltd (ASX: PBH) share price down 75%

Megaport Ltd (ASX: MP1) share price down 69%

Airtasker Ltd (ASX: ART) share price down 62%

Kogan.com Ltd (ASX: KGN) share price down 61%

The share prices of all those companies got well ahead of itself, not to mention being aided by healthy doses of irrational exuberance from locked-down and bored retail investors.

Reality has hit, and hit hard, due to slowing or declining growth, excessive valuations and a market no longer willing to fund losses ad-infinitum. 

One sector riding a genuine post-COVID boom is travel, with demand and prices riding high. The Qantas Airways Limited (ASX: QAN) share price is flying high, up 160% from its March 2020 low as continued strength in travel demand has resulted in profit upgrades.

So you'd expect the Flight Centre Travel Group Ltd (ASX: FLT) share price to also be riding high… except it's down more than a third in the past 14 months. Fellow travel agents Corporate Travel Management Ltd (ASX: CTD) and Helloworld Travel Ltd (ASX: HLO) are also on the nose, their share prices down 45% and 50% over a similar period.

Dragging them lower appears to be lower profit margins as airlines, most notably Qantas, announced during the pandemic they would cut commissions paid to travel agents. 

Adding to sector woes are the prospect of a coming economic slowdown, something that traditionally sees consumers cut discretionary spending on luxury items like travel, and less corporate travel as companies cut costs and continue to use Zoom and Teams for their meetings.

In a trading update in late October, Corporate Travel said FY23 is expected to "remain choppy" but is expecting a "full recovery" in FY24, and underlying EBITDA of $265 million. Compared to today's market capitalisation of around $2 billion, that looks neither cheap nor expensive, but about right, especially given much can change over the next two years.

The post Why this one top fund manager is optimistic about 2023, and one little-known IPO that has hit it out of the park appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Helloworld Travel, Kogan.com, Megaport, PointsBet, and Zip Co. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Airtasker. The Motley Fool Australia has positions in and has recommended Helloworld Travel and Kogan.com. The Motley Fool Australia has recommended Corporate Travel Management, Flight Centre Travel Group, Ipd Group, Megaport, and PointsBet. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

1) So much for the so-called Santa Rally…

In Wednesday's trade, the ASX 200 has followed United States markets lower as a host of Wall Street executives warn of tougher times ahead.

Goldman Sachs' CEO David Solomon said a US recession in 2023 is a possibility and that it should be no surprise that job cuts could be on the table.

JPMorgan Chase's Jamie Dimon, in between having yet another dig at cryptocurrencies, likening them to pet rocks, warned of a mild to hard US recession next year.

Bank of America CEO Brian Moynihan said the bank has slowed hiring.

And Morgan Stanley said it will reduce its global workforce by about 2,000.

"We have not yet seen the bottom on equity prices," said Lauren Goodwin, portfolio strategist at New York Life Investments on Bloomberg. "While this phase of equity market volatility is likely to end in the next few months, earnings have not yet adapted to a recessionary environment."

The big US investment banks are about 10,000 miles away from the home of the ASX, but the old saying "when Wall Street sneezes, the ASX catches a cold" usually rings true. 

2) For a change, the stock market moved in response to the upcoming economic slowdown – something that will impact corporate earnings – rather than the move in bond yields, which in turn reflect future interest rate expectations.

Although there are the inevitable outliers, consensus is that central banks will be finished raising interest rates at or before the middle of next year. 

In other words, the heavy lifting on interest rates has already been done. Next up is estimating the impact it will have on corporate profitability.

You could argue/guess that most of the coming economic slowdown is already priced into many stocks. I've repeatedly used the example of high-quality retailer JB Hi-Fi Limited (ASX: JBH), which trades on a valuation that is expecting "bad things" ahead. 

3) The stock market looks forward, with discretionary consumer stocks like JB Hi-Fi likely to move higher before earnings have bottomed for this economic cycle.

As to where they will bottom – and the bottom could still be higher than current levels of profits – is the great unknown.

As to when they will bottom, the pundits are queuing up to take a guess.

Over in the US, quoted on Bloomberg, David Bailin, chief investment officer at Citi Global Wealth, said markets have never bottomed before a recession has begun. "If there is in fact going to be a recession next year, if we are going to see a period of unemployment rising in the country, then we would expect that markets would have to settle down from where they are today over the course of the next several months."

Back in Australia, Bell Potter's Richard Coppleson said on Livewire the bear market is not over yet. The worst is likely still ahead of us.

Coppleson said we could see a lot of market pain at the start of the year, with a low in mid-March 2023. 

"The patterns of the past suggest we're coming close to the end of the current rate rise cycle and the bear market. If March 2023 becomes the final market low, and the start of the bull market run, investors may find opportunities there. They'll need to have a strong stomach though. The evidence for a change will take time to appear. Bear markets don't last forever after all."

Writing in its November 2022 monthly report, the 1851 Emerging Companies Fund believes we will not see a hard landing for the consumer during 2023, and in a contrarian bet, has been progressively increasing its weighting to the retail sector.

"Our expectation is better days lie ahead for the Australian small cap market and we are progressively rotating the portfolio to take advantage as we enter 2023."

They are definitely getting in ahead of the game… which is the game when it comes to stock picking.

4) So what's an investor to do?

I'd suggest four things…

1. Keep a healthy cash balance. These days you get paid for waiting. Plus, it helps you sleep well at night. I'm quite cashed up having recently received funds from a company that was bought out, I have more to come from my Nearmap Ltd (ASX: NEA) shares (also acquired), plus even more to come from my MSL Solutions Ltd (ASX: MSL) shares (in the process of being acquired).
   
2. Don't sell out of any existing positions just because you think markets might tumble further between now and March 2023. Jumping in and out of the market only makes money for your broker. You'll very likely get the timing very wrong.
   
3. Keep adding to existing positions â€“ or take out starter positions in new holdings – if you think are well placed to weather an economic slowdown, and trade on modest valuations. Easier said than done but hey, that's investing.
   
4. There's unlikely to be a time when you should go "all in" on a stock or indeed into the market. But you can certainly look to put more money to work should the market fall another say 10% to 20% from here. The problem is, when it happens, that's hard to stomach, because inevitably, you can't pick the bottom, and new money invested in the market can quickly be in the red. 

The time to commit to such a course of action is now, when things are relatively calm. Something like, if the markets fell by say 20% from here, committing to invest at least 50% of your cash balance into stocks. It'll be scary, but in five years time, it'll very likely look a brilliant move.

The post As 2 experts predict the stock market is yet to bottom, here are 4 things every investor can do now to prepare for the worst appeared first on The Motley Fool Australia.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bruce Jackson has positions in Msl Solutions and Nearmap. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended JPMorgan Chase and Nearmap. The Motley Fool Australia has recommended Jb Hi-Fi. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

1) It continues to be a tough old grind for those – like myself – who are not invested in the resources sector. 

Fund manager reports for November are just coming out, with QVG Capital saying the Small Resources Sector was up 11.6% in the month.

"With limited exposure to Resources, we did not keep up with the benchmark."

Rather than jump into a resources sector which they say "usually lacks the earnings certainty of through-the-cycle return on invested capital (ROIC) we desire," QVG Capital is sticking with industrials such as fast growing Johns Lyng Group Ltd (ASX: JLG) and even faster growing Lovisa Holdings Ltd (ASX: LOV).

Although not traditionally cheap – fast fashion jewellery retailer Lovisa shares trade at around 40 times earnings –  with sales up 60% for the first 19 weeks of FY23, it won't take too long for the company to grow into its premium valuation.

As QVG Capital reminds us, over longer timeframes, share prices follow earnings. If Lovisa can keep up its breakneck global store opening pace in conjunction with double digit comparable store sales, the future looks bright.

2) Put simply, equity markets are facing two major headwinds…

1. Higher interest rates.
2. Slower economic growth. 

The Reserve Bank of Australia (RBA) today raised interest rates by another 25 basis points, bringing the cash rate to 3.1%. 

Whilst this inflicts more pain on variable-rate mortgage holders, long-suffering savers are finally able to earn a decent return on their cash balance, with some savings accounts paying close to 4%.

A no-risk 4% compares pretty well to the 3.6% fully franked dividend yield on offer for Commonwealth Bank of Australia (ASX: CBA) shares, and very well to the 2.7% fully franked dividend yield on offer for Woolworths Group Ltd (ASX: WOW) shares. Given those two companies are both growing slowly and trading on premium valuations, given the choice, I'd happily park my cash in the bank.

No wonder industrial sector equities are on struggle-street.

3) The economy is not the stock market, and so although 2023 is likely to see slower or even negative growth for some companies, shares could perform well.

In a recent article on Livewire titled "Why 2023 could be the biggest buying opportunity since the GFC," J.P. Morgan Asset Management's global team believes "2023 will see the traditional 60/40 portfolio record its best year since 2010. In their view, average forecast returns for both equities and bonds will continue to climb even if a global recession hits."

The team is tipping both developed and emerging market equities to rebound, and although the S&P/ASX 200 Index (ASX: XJO) has outperformed its developed market peers, they are projecting it to return 7%+ per annum over the next 10-15 years.

In a world fixated on the next monthly move by the RBA or the next inflation print or the next jobs report, you've got to love their long-term perspective. 

A 7% per annum return compounded over 10 years will roughly double your money. Not exciting like the tech-stock boom (RIP) some of us recently enjoyed, but very good, especially when compared to just about every other asset. Can you imagine your $1 million investment property doubling in value by 2032? It would require someone taking on an astronomical monthly repayment to take that property of your hands. 

No wonder property prices are falling.

4) So which stocks will be beneficiaries in 2023?

If only we knew. The J.P. Morgan boffins referenced above have a preference for defensive sectors, including healthcare and banking stocks.

I'm happy to pass on bank shares. 

Quality large-cap ASX 200 healthcare stocks like CSL Limited (ASX: CSL), Ramsay Health Care Limited (ASX: RHC) and Cochlear Limited (ASX: COH) all trade on nose-bleed valuations. I'll pass on them too, thank you very much.

No wonder stock picking is hard.

5) One sector that is cheap is energy, despite many shares having already had a great run so far this year.

Interviewed in the AFR, SG Hiscock portfolio manager Hamish Tadgell says his fund is positioned for higher inflation and the energy transition, with a top three holding being Woodside Energy Group Ltd (ASX: WDS) shares.

The Woodside share price has already gained more than 60% so far in 2022, but Tagell's still a fan, saying in terms of balance sheet, "it's got good growth options through Scarborough and the West Australian developments it's looking at. And that's in a world where I think there's clearly an increased demand for gas." 

Woodside shares trade at just eight times trailing earnings. Add in a trailing 9% fully franked dividend yield and you can see the attraction. 

The post 5 popular ASX 200 stocks I'm avoiding, plus one that still looks dirt cheap appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended CSL, Cochlear, Johns Lyng Group, and Lovisa. The Motley Fool Australia has recommended Cochlear, Johns Lyng Group, Lovisa, and Ramsay Health Care. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

1) Despite a choppy session on Wall Street on Friday, the S&P/ASX 200 Index (ASX: XJO) rose in lunchtime trading on Monday in yet another show of resilience for the local stock market.

Once again, as has been the case for most of the year, materials and energy stocks are getting the job done today, with the Fortescue Metals Group (ASX: FMG) share price leading the way higher. It's up 7.67% on the day so far after the iron ore price posted a hefty one-month gain. 

The ASX 200 index has fallen just 3.3% so far in 2022, an outstanding return given the Reserve Bank of Australia (RBA) has hiked the cash rate from just 0.1% in April to its current level of 2.85%. 

By contrast, although they've enjoyed a nice bounce since the beginning of October, US markets have endured a painful year, the S&P 500 Index down 15% and the Nasdaq Composite plunging almost 28%.

2) Local eyes are on the RBA's final meeting of the year, with consensus expectations the central bank will tomorrow raise the cash rate by another 25 basis points as it continues the fight against inflation.

Financial markets are pricing a peak in the cash rate of about 3.6% early in the second half of 2023, although Bank of America expects the RBA to follow up tomorrow's rise with four consecutive 25 basis point hikes, bringing the terminal rate to 4.1%.

According to the AFR, Bank of America thinks "the RBA is underestimating wage pressures and that its slow hiking pace means more work will need to be done to rein in inflation."

Whichever way you look at it, we're closer to the end of the heavy lifting on interest rates than the start. That's good news for equity markets.

The bad news for equity markets is higher interest rates will put the brakes on economic growth. According to Rate City, monthly repayments on a $500,000 mortgage have increased by $834 since May. 

That's a LOT less money that can be spent on discretionary items such as clothing, gadgets, and couches. It explains why the share price of JB Hi-Fi (ASX: JBH) trades on a fully franked dividend yield of 7% and a price-to-earnings (PE) multiple of just nine times profits. 

3) Although inflation may have peaked, a mild recession is the base case scenario for the US economy. It's going to be hard for many companies to grow their profits, with many going into reverse as profit margins also come under pressure. 

It's why investing into the teeth of a bear market is so hard. Companies like JB Hi-Fi might look cheap today, but less so based on next year's earnings. As predicting the near-term future is virtually impossible, investing in individual companies today means taking a leap of faith.

Buying quality companies with strong balance sheets and minimal debt – and JB Hi-Fi certainly fits that bill – is one way to mitigate the risk. But will that stop you bailing out if/when: a) a bout of stock market volatility hits and b) a subdued trading statement smacks the share price lower?

Many investors fail to enjoy the attractive long-term returns on offer from investing in the stock market because they interrupt the effects of compounding. They may buy a stock with the intention of holding it for five years or longer, but there's a heck of a lot that can happen to a company and its share price over that time period, likely including a peak-to-trough fall of around 50%.

Investing regularly into a few low-cost index-tracking exchange-traded funds (ETFs) is a great option for most stock market investors. It takes stock picking out of the equation, and volatility is greatly reduced. 

My favoured option is the Vanguard MSCI Index International Shares ETF (ASX: VGS). If you want to throw in a local flavour, consider adding the Vanguard Australian Shares Index ETF (ASX: VAS). You'll get exposure to the big miners, the big banks, and the big supermarkets.

4) If you are a stock junkie like me, and you have ambitions of outperforming the market, investing in individual companies can be interesting, fun, and rewarding.

That said, it can also be very challenging, as it has been for many investors over the past 15-odd months. 

The very best stock pickers only get it right six times out of ten, because when they do pick a big winner, the upside is unlimited. Imagine putting $5,000 into one stock and 10 years later, look back and see it has appreciated 2000%, turning that one investment into over $100,000. 

Fun, right? 

Not so much fun are the inevitable losers, the four out of ten you'll get wrong. Although a few of the stocks I highlighted a month ago have had good recent runs, I'm still in the hole on a number of my small and microcap holdings, including Plenti Group (ASX: PLT) shares and Bluebet (ASX: BBT) shares.

On those latter two, hopefully, it's a case of waiting for the market to appreciate their growth prospects and modest valuations. Although it could also be a case of me being wrong and their share prices never recovering, or worse, declining further, ultimately potentially leaving me sitting on losses of around 80%. 

5) It's why portfolio sizing is key. I try not to chase my losers, especially ones whose share price is declining at the same time as the growth of the underlying business is slowing. That's the case with Plenti and Bluebet, and why I'm not adding to my holdings despite the share price weakness. 

It took me many years to realise I'm no investing genius like Warren Buffett, someone who takes huge high conviction bets on a very small number of companies. For mere mortals, hedge your bets by spreading your bets across 20 or 30 different stocks. The winners will inevitably rise to the top, the losers slowly disappearing into tiny, inconsequential holdings.  

I also realise I'm no Warren Buffett when it comes to investing returns. He's compounded at an average annual return of 20% for 56 years. If you can do between 8% and 12% for 20 or 30 years – including regularly adding money to the market over that period – you'll do very well as an investor.

The post It took me years to realise I'm no investing genius like Warren Buffett appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has positions in BlueBet and Plenti Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Vanguard Msci Index International Shares ETF. The Motley Fool Australia has recommended BlueBet, Jb Hi-Fi, and Vanguard Msci Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

1) It's another solid day for the S&P/ASX 200 Index (ASX: XJO), up 27 points or 0.38% on Thursday afternoon.

In what feels (to me at least) like the year from hell for stock market investors, the ASX 200 is down just 1.9% over the past 12 months. By contrast, on Wall Street, the S&P 500 Index (SP: .INX) has fallen 14%, with the Nasdaq Composite (NASDAQ: .IXIC) down almost 29%.

The resources sector has been powering the ASX 200 index higher, with coal and lithium the standout commodities. The Whitehaven Coal Ltd (ASX: WHC) share price has soared more than 255% over the past year, while the Core Lithium Ltd (ASX: CXO) share price has jumped 160% in the same period.

You have to go all the way down to the 18th best ASX 200 index performer over the past 12 months to find a non-resources company, that being Computershare Limited (ASX: CPU), its shares rising by 41%. Bringing up the rear is poor old Magellan Financial Group Ltd (ASX: MFG), its shares crashing 71% over the past year.

Therein lies the tale of the tape for investors… great for commodities, awful for many industrials and most technology shares, including those who invest in US markets. 

Count me in the latter group, despite some individual success, like the takeover of MSL Solutions Ltd (ASX: MSL) at an 80% premium, and my largest position – Warren Buffett's Berkshire Hathaway (NYSE: BRK.B) – being up 10% over the course of the last year.

2) Still, I live to fight another day. I hold a decent cash balance, and hold out recovery hopes – over the next three to five years – for my beaten-down ASX growth stocks.

In these times when the macro – particularly inflation and, therefore, interest rates – is driving the direction of the markets, it's easy to get caught up worrying about the next day or week, rather than keeping your investing eyes on the horizon.

Howard Marks of Oaktree Capital is one of Wall Street's legendary investors. In his latest memo, Marks tells us mere mortals…

"The vast majority of investors can't know for sure what macro events lie just ahead or how the markets will react to the things that do happen."

He basically says – for any number of reasons – that investors should pay little attention to macro events. He also reminds us that volatility – effectively, the short-term movements in share prices – is just a temporary phenomenon, and that most investors shouldn't attach importance to it. 

As markets continue to gyrate mostly to the tune of the words of central bankers, particularly the Federal Reserve, Marks reminds us "what really matters is the performance of your holdings over the next five or ten years".

"Invest in companies that will become more valuable over time," says Marks. It's as simple as that.

3) The Hyperion Small Growth Companies Fund has had a rough 12 months, down 27% as fast-growing stocks have been taken to the woodshed.

In February 2021, Morningstar selected Hyperion Asset Management as the overall Fund Manager of the Year, and over the long term, the fund has soundly outperformed its S&P/ASX Small Ordinaries Accumulation Index benchmark. 

Writing in its October update, the Hyperion Small Growth Companies Fund says that, while they are seeing "persistent short-termism from market participants", they remain confident in the "strong fundamentals and sustainable competitive advantages" of the companies in their portfolio.

Hyperion's base case is that lower growth and lower inflation appear to be the most likely long-term scenario, an environment they believe their portfolio companies "will produce materially higher earnings growth than the broader market over the long term due to their superior value propositions, strong pricing power and low penetration rates".

You have to admire the fund's conviction, with its top five holdings making up more than 50% of its portfolio, being Wisetech Global Ltd (ASX: WTC), Fisher & Paykel Healthcare Corp Ltd (ASX: FPH), Xero Limited (ASX: XRO), Domino's Pizza Enterprises Ltd (ASX: DMP), and Lovisa Holdings Ltd (ASX: LOV). 

None are cheap, even after the share prices of all apart from Wisetech and Lovisa have taken a pasting this past 12 months, yet the fund is clearly backing them all to deliver in the years ahead, damn the short-term volatility.

I'm hoping the Hyperion Small Growth Companies Fund is right, not least because I have a similar investing style and own some of the same companies (check disclosures below). 

For growth investors, these past 12-18 months have been tough to watch and tougher to invest through as we've watched the value of our portfolio wither away, sometimes quickly, other times by way of slow death.

Taking lessons from above, as we look forward, here are three things that give me comfort…

1. The huge winners of the next 12-24 months are rarely the same companies that have just seen their share prices shoot to the moon. In particular, I'm looking at the air coming out of many ASX lithium stocks, and I wouldn't be surprised to see much tougher times ahead for many ASX coal stocks. When everything resources goes up, it's worth remembering they are called commodities for a reason.
   
2. Although mindful that Howard Marks says we should pay little attention to the macro, I'm willing to stick my neck out and say I think most of the pain from interest rate rises is already behind us. There will still be bumps ahead, and potentially recession in the US, Europe and New Zealand (but probably not Australia), but I don't think we'll see huge falls in quality growth stocks going forward.

3. Over the long term, profit growth drives share price growth. Not valuation. Not interest rates. Not Putin, Trump, the RBA or the Federal Reserve. Hyperion is backing its top five holdings to keep growing for many years to come. Do that, and today's lofty valuations will be largely meaningless… over the long term.

The post Three comforting lessons for investors whose portfolio has been smashed versus the surprisingly good return of the ASX 200 appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has positions in Berkshire Hathaway (B shares), MSL Solutions Limited, WiseTech Global, and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway (B shares), Lovisa Holdings Ltd, WiseTech Global, and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has positions in and has recommended WiseTech Global and Xero. The Motley Fool Australia has recommended Berkshire Hathaway (B shares), Dominos Pizza Enterprises Limited, and Lovisa Holdings Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Nor does it stop the so-called professionals, including Goldman Sachs.

According to a Reuters report, the investment banking giant – famously described in 1999 by Rolling Stone journalist Matt Taibbi as a "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money" – warned the US equity bear market is not over yet.

This is despite the S&P 500 having rallied 10% off its recent lows, with the ASX 200 index up 11% since the beginning of October. Excerpt:

Goldman Sachs on Monday warned that the global equity bear market is not over as the markets are yet to see a trough in the momentum of global growth deterioration, a peak in interest rates and valuations lowered to reflect a likely recession.

"We continue to think that the near-term path for equity markets is likely to be volatile and down before reaching a final trough in 2023", Goldman Sachs said in a note.

2) According to the Australian Financial Review, Morgan Stanley equity strategist Chris Nicol has set an ASX 200 index target at 7200 with a total return of 7 per cent. Excerpt: 

The range of outcomes is wide with a bullish forecast of 8100 or a 20 per cent return and a bearish forecast of 5900 or a negative 11 per cent return.

The firm is overweight energy, healthcare and diversified mining companies, and underweight banks, housing and consumer stocks.

"2023 looms as a year of peaking signals and stress. Australia lags in terms of tightening impact, with earnings and activity still to adjust. Index target [is] seen at 7200," Mr Nicol says.

At the close of trade on Tuesday, the S&P/ASX 200 Index (ASX: XJO) finished at 7181, almost bang on the target set by Morgan Stanley.

It seems Nicol is banking on the big dividends from the likes of BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), and Woodside Energy Group Ltd (ASX: WDS) continuing into next year to get to his total return target of seven per cent.

3) A trading update today from discount apparel retailer Best & Less Group Holdings Ltd (ASX: BST) makes sombre reading for shareholders like myself. It also delivers pain to shareholders, with the Best & Less share price plunging more than 13% lower to $2.35. Excerpt:

After reporting +38.0% total sales growth for the first eight weeks of FY23, sales growth has since moderated, reflecting the delayed start to summer weather and supply chain delays.

While unaudited year to date (YTD) earnings to the end of October are in line with the prior corresponding period (PCP), a significant increase in sales growth from current levels is required to maintain this result for the first half.

Last week, I named Best & Less as "one consumer discretionary stock I'm playing for the coming economic slowdown". 

Today's update suggests trading has fallen off a cliff in recent weeks. I'm hopeful it's weather related, although subdued consumer confidence largely as a result of rising interest rates will no doubt have played a role. The big unknown is the competitive threat from the likes of Wesfarmers Ltd (ASX: WES) owned K-Mart, something that will be far more enduring than a bout of soggy weather.

Buying something because it's cheap – Best & Less shares previously traded at less than nine times earnings and on a fully franked dividend yield of over 9.1% – offers some level of downside protection, but not enough to offset a poor trading update and the real possibility that profits will fall. 

It's yet another reminder to myself that…

• Investing in the retail sector is incredibly tough, courtesy of the competitive and economic environment. 
• You are better to pay up for a quality company with a sustainable competitive advantage – one that can steadily compound earnings for years to come – than buying a mediocre company on the cheap, hoping it will re-rate before the inevitable profit warning.
• Investing is hard.

I'm holding onto my Best & Less shares for now. They are a small position in my diversified portfolio, and I hold out hope that trading will improve in the run-up to Christmas. I'm most certainly not adding to my position – even after today's sell-off, the risks are to the downside for Best & Less shares.

4) Crypto investors are in a world of hurt, with the Bitcoin price down 72% over the past 12 months.

Writing on Livewire, Coolabah Capital's Christopher Joyce says the crypto crash "bears the hallmarks of a standard non-bank financial crisis that inevitably arises every time there is a liquidity shock. Unfortunately, it is likely to get worse." Excerpt:

Non-banks, including many crypto concerns such as exchanges and coins, have almost no regulation and/or scrutiny. And they tend to be murky private businesses, run by anonymous individuals, often located in dubious jurisdictions, that are protected from the reporting demands of public market enterprises.

Most of what we see today in the crypto universe will die. There will surely be some residual winners, and there are doubtless some impressive technological innovations that will sustain. But anything of serious value will likely be absorbed by the traditional banking system. The dominant digital currencies of the future will be those issued and guaranteed by nation states.

As an equities person, I've happily let the whole crypto craze pass me by, not tempted by the once seemingly easy money on offer in months and years gone past. I've had no problems losing money this past year without adding crypto to my list of things to worry about.

Still, I never like to see people losing money, especially those who trusted the now-bankrupt FTX exchange with their crypto assets. They are staring down the barrel of a near-total loss.

I'd warn against trying to bottom-fish the crypto space. The current lack of trust in the asset class combined with a potential liquidity crunch means future returns are highly unpredictable and incredibly risky. There are surely easier ways to make money. 

5) That said, Cathie Wood of Ark Investment Management is wading into the space, scooping up shares of struggling cryptocurrency exchange Coinbase Global Inc (NASDAQ: COIN), despite the collapse of Sam Bankman-Fried's FTX. 

According to Bloomberg…

Wood's Ark Investment Management funds have bought more than 1.3 million shares of Coinbase since the start of November, worth about $56 million based on Monday's trading price, according to data compiled by Bloomberg. The shopping spree, which started just as FTX's demise began, has boosted Ark's total holdings by roughly 19% to about 8.4 million shares. That equates to around 4.7% of Coinbase's total outstanding shares.

The Coinbase share price has fallen almost 84% so far this year, outpacing the 64% fall in Cathie Wood's flagship ARK Innovation ETF. It's been a very tough year for growth investors, crypto and stocks alike.

The post Bear market not done yet says Goldman Sachs, while Morgan Stanley predicts dividends will be the driver of returns in 2023 appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has positions in Best&Less Group Holdings Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Coinbase Global, Inc. and Goldman Sachs. The Motley Fool Australia has positions in and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

"US producer price growth stepped down in October by more than expected in the latest sign that inflationary pressures are beginning to ease," reports Bloomberg.

Bullish investors are hoping inflation has peaked, meaning the Federal Reserve will moderate the pace of its interest rate hikes.

The S&P 500 Index (SP: .INX) has jumped 6.5% higher in just the past four trading days, whilst the NASDAQ-100 Index (NASDAQ: NDX) has soared almost 10% higher in the same period.

Here in Australia, markets have been a little more subdued, partly because the ASX hasn't fallen as far as US indexes, partly because the S&P/ASX 200 Index (ASX: XJO) is dominated by big miners and banks, and partly because the RBA has already shown its hand by easing the pace of interest rate rises. 

The ASX 200 index is now down a very modest 3.9% over the past 12 months.

2) Not everyone is convinced it's all plain sailing ahead, and the Federal Reserve will be able to pull off an economic soft landing. From Bloomberg…

"Markets appear to be pricing in a best case scenario of a soft landing and falling inflation triggering a Fed pause," Venu Krishna, head of US equity strategy at Barclays Plc. 

"In our view, this is not a given and remains a low probability scenario – these are just a few data points on inflation and it needs to be sustained. Even if the Fed eventually pauses, it might not be able to prevent a shallow recession."

3) Recession or not, soft or hard, Warren Buffett is buying, the Sage of Omaha taking a roughly $US5 billion stake in Taiwan Semiconductor Manufacturing Co (NYSE: TSM), the chip supplier to companies like Nvidia, Qualcomm and Apple. 

Marketwatch headlines the story with…

"Warren Buffett's chip-stock purchase is a classic example of why you want to be 'greedy only when others are fearful.'"

According to Bloomberg…

"TSMC shares at home in Taiwan had dropped 28% this year through Monday's close, as demand for chips has slowed with the economic downturn and investors fretting about oversupply. The company said in October it pulled back on capital spending to about $US36 billion this year, which would still be a record high, down from at least $US40 billion planned previously."

The 92 year old Buffett has famously said his ideal holding period is forever, a period which will encompass many economic cycles. Such thinking has served him well, given his net worth of over $US100 billion, the vast majority of which was accumulated later in his life, courtesy the power of compounding returns.

4) Conventional wisdom, perhaps built up over the 30 years since Australia had a "proper" recession is that the lucky country will once again keep growing in 2023 and beyond. 

Unemployment remains low, immigration is starting to pick up again and commodity prices are high. The banking sector, as demonstrated by Commonwealth Bank of Australia (ASX: CBA) saying yesterday that credit quality indicators improved in the most recent quarter, remains strong.

Pushing against that goldilocks scenario are falling house prices, high inflation, higher interest rates and weak consumer confidence.

What's it all mean? It's a given the Australian economy will slow next year. 

The International Monetary Fund (IMF) has forecast economic growth will slow from 3.7% this year to just 1.7% in 2023-24 as those headwinds hit our shores. But, according to the AFR, it warned "that a deeper plunge in global growth than forecast, more persistent inflation, and a faster-than-expected decline in house prices could push the economy off course."

"Australia is expected to steer clear of a recession, but with significant downside risks."

5) What's all this mean for stock market investors?

We've already seen what Warren Buffett thinks.

As for a mere investing mortal like myself, it certainly doesn't change my view that consumer discretionary stocks – largely retailers – are likely in for a tougher time ahead.

The market always looks forward, and such pessimism could already be priced into a number of retail stocks. 

JB Hi-Fi Limited (ASX: JBH) shares trade on just 9 times earnings and a fully franked dividend yield of 7.3%.

Nick Scali Limited (ASX: NCK) shares trade on 10 times earnings and a fully franked dividend yield of 7.2%.

Super Retail Group Ltd (ASX: SUL) shares trade on 10 times earnings and a fully franked dividend yield of 10.8%.

I'm happy to sit on the sidelines and watch the action play out for those companies. In really tough times, a halving of profits is absolutely possible, turning the share price from cheap to expensive, and dividends can be cut to zero. 

One consumer discretionary stock I'm playing for the coming economic slowdown is Best & Less Group Holdings Ltd (ASX: BST). 90% of its items sold retail for less than $20 and their average selling price is a modest $8.33.

Babies and kids grow, and as they do, need replacement clothes, so there's a repeat purchase element to the Best & Less business… unlike JB Hi-Fi where you can live with your TV for an extra year, or Nick Scali where you can live with your current sofa for a few more years.

Recent commentary from US discount retailer Walmart strengthens the case for a company like Best & Less with Chief Financial Officer John Rainey saying Walmart is winning new business from higher-income shoppers searching for bargains amid a challenging economic environment.

Best & Less shares trade at less than 9 times earnings and on a fully franked dividend yield of 9.1%.

6) Yesterday saw a nice payday for the Jackson Portfolio, with microcap MSL Solutions Ltd (ASX: MSL) share price jumping 70% higher on an all-cash takeover agreement. 

There's plenty of value in the microcap sector, if investors are willing to stomach the volatility and lack of liquidity. 

And there are plenty of value traps too, some of which I've found, to my cost, although position-sizing and downside protection has limited my losses. The key, as with any investing, is to buy quality companies that have at least some sort of competitive advantage and have at least an element of recurring revenue. 

MSL Solutions – a company that operates point of sale solutions at major sporting arenas – fits the bill nicely, given the long-term nature of its contracts. 

If only I'd backed myself more, taking an even bigger position. That's investing, where the fear of the unknown can impact your decision making, and where, despite a large monetary gain, you can still be dissatisfied. I'll get over it!

The post Buffett buys up big amidst recession fears. One cheap ASX share I'm backing, plus why I'm dissatisfied despite a huge one-day windfall appeared first on The Motley Fool Australia.

More reading

• Why these ASX ETFs could be top picks for investors in their 50s
• Buy, hold, sell: Life360, Northern Star, and Sigma shares
• 2 ASX gold stocks to buy next week
• $100k vs $600k in superannuation: How different would retirement be?
• A rare buying opportunity to buy 1 of Australia's top shares?

Motley Fool contributor Bruce Jackson has positions in Best&Less Group Holdings Ltd and MSL Solutions Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple, Nvidia, Qualcomm, Super Retail Group Limited, and Taiwan Semiconductor Manufacturing. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has positions in and has recommended Super Retail Group Limited. The Motley Fool Australia has recommended Apple, JB Hi-Fi Limited, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Writing in its October monthly update, the Firetrail Australian Small Companies Fund names the NobleOak Life Ltd (ASX: NOL) share price as one of the negative contributors for the month.

Although the fund has struggled over the past 12 months, since inception in February 2020, it has returned 11.5% per annum, soundly outperforming its benchmark.

October saw the Firetrail Australian Small Companies Fund gain 4.7% after fees, underperforming the Small Ordinaries Accumulation Index by 1.7%. 

Positive contributors included the Life360 Inc (ASX: 360) share price soaring 40% in October after the family communications application announced increased prices for new and existing US subscribers. The fund notes Life360 has 27 million monthly active users in the US, approximately 8% of the total US population.

Turning to detractors, the NobleOak Life share price fell 12% in October on very thin trading volumes. Since the end of the month, this ASX small-cap share has continued to struggle, now trading at close to a 52-week low. 

The fund notes the life insurance sector has performed poorly in 2022 despite its defensive earnings and industry tailwinds from policy repricing and rising interest rates. 

Not deterred, Firetrail estimates NobleOak will see an approximate 7-10% profit tailwind from rising interest rates in FY23. 

Whatever the reason – the war in Ukraine, the pandemic or recession fears – the fund is encouraged by consumer willingness to buy life insurance increasing by "an amazing" 35% in the past two years. 

When reporting FY22 results in late August, NobleOak said it delivered another year of strong growth in in-force premiums and underlying profits, exceeding its key prospectus forecasts. 

For FY23, the ASX small-cap share says "in-force premiums are expected to grow ahead of market with a disciplined approach to drive continued profit growth".

NobleOak was a July 2021 IPO, with shares issued at $1.95 per share. Its share price hit a high of $2.45 in March 2022 before retreating back to $1.57 today.  

The post Down 30% so far in 2022, leading fund manager Firetrail sees a bright future for this under-the-radar ASX small-cap share appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Life360, Inc. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

It has been a tough 12 months for tech stocks, with the S&P/ASX All Technology Index (ASX: XTX) losing 35% as sharply higher interest rates take their toll on the sector.

Notable losers have been the Megaport Ltd (ASX: MP1) share price losing 71% over the past 12 months, and the Xero Limited (ASX: XRO) share price down 53%.

Although still sporting a negative return since this time last year, the RPM Global Holdings Ltd (ASX: RUL) share price has only fallen 12%.

RPM Global provides advisory consulting, technology and professional development solutions to the mining industry. Think of it as a "picks and shovel" play, a company seeking to benefit from the mining sector no matter which company or which mineral is "winning."

RPM Global shares had a strong October, its share price rising 25%. Late in the month, at its AGM, the company's stand-in Chairman confirmed it has started the 2023 financial year strongly, reconfirming its guidance for the full year of revenue of $101 million and EBITDA of $14.2 million.

The RPM Global share price trades at $1.88, giving the company a market capitalisation of $432 million. 

Writing in its October monthly update, the Ellerston Australian Micro Cap Fund noted RPM Global's guidance was a significant increase on the prior year.

The fund believes RPM Global is well placed to benefit from the continued digitisation of mine sites and the increased penetration of its software across its key customers globally. It names global resource leaders such as Rio Tinto Limited (ASX: RIO) and BHP Group Ltd (ASX: BHP) amongst its diversified client base.

The Ellerston Australian Micro Cap Fund concluded…

"The group continues to be a stand-out in the technology sector, with a combination of strong top-line growth and operating leverage, as well as the announced buy-back underway."

Whilst not cheap, trading at over four times sales and over 30 times EBITDA, as a software business, RPM Global has strong recurring revenue and expanding profit margins. 

In helping mining companies manage a mine site in the most optimal way over its expected useful life, the company offers a mission critical service. This should make it near impossible for its customers to give up, providing highly sticky recurring revenues for years to come. 

The post Fund manager names this ASX All Ordinaries stock as 'a stand-out' in the technology sector appeared first on The Motley Fool Australia.

More reading

• Why these ASX ETFs could be top picks for investors in their 50s
• Buy, hold, sell: Life360, Northern Star, and Sigma shares
• 2 ASX gold stocks to buy next week
• $100k vs $600k in superannuation: How different would retirement be?
• A rare buying opportunity to buy 1 of Australia's top shares?

Motley Fool contributor Bruce Jackson has positions in RPMGlobal Holdings and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended MEGAPORT FPO, RPMGlobal Holdings, and Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool Australia has recommended MEGAPORT FPO and RPMGlobal Holdings. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Xero reported revenue grew 31% over the past six months, but that translated into only an 11% increase in earnings before interest, tax, depreciation, and amortisation (EBITDA). Free cash flow was just $NZ15.6 million as the company continues to reinvest to drive long-term shareholder value.

Problem is, when your market capitalisation is close to $10 billion, and in these times of higher interest rates when the market wants to see a decent level of cash generation, a few million dollars of free cash flow isn't going to pass muster.

To some, Xero may offer value, given the lifetime value of a customer is around seven times its cost of acquisition. But it's going to take a long time for the company to grow into its valuation, and in this market, patience is not a strong point. It will likely be many years before the Xero share price gets back to the heady days of $150.

2) If ASX growth shares are on the nose, value shares must be the way to go.

There's no shortage of companies that look like great value, trading on single-digit earnings multiples and very attractive dividend yields.

Data from S&P Capital IQ, P/E multiple based on last twelve months earnings. Dividend yield is historical, not forecast.

If only stock picking was this easy… 

Looking forward, each company has its challenges. When it comes to investing, there's always a catch.

Commodity prices are hard to predict, and typically the time to buy mining stocks is at the bottom of the cycle, not near the top, as is the case now due to booming oil, iron ore and coal prices.

Retailers have some serious headwinds ahead as sharply higher interest rates start to put a bite on retail spending. As to what extent, we're all just guessing at this stage.

By lengthening your time horizon, you put the odds more in your favour. 

Will JB Hi-Fi be generating higher profits in five years' time than now? You'd imagine so, but how much higher? Only 20% higher translates into a less than 4% compound annual growth rate (CAGR). But 50% higher is a much more attractive 8.5% CAGR, with dividends on top. Any expansion in its earnings multiple would be jam on top of the cake.

Obviously, Magellan Financial Group will not be trading on a forecast dividend yield of anything like 18.5%. Its forward dividend yield could be closer to 0%. Will we look back five years from now at Magellan's enterprise value of around $700 million versus its funds under management of $50 billion and think this is a value stock? Maybe.

3) Even legendary value investor Anton Tagliaferro is struggling to find obvious value.

Interviewed by Livewire Markets, the founder of Investors Mutual said with the recent stock market rally, it's become more difficult to uncover the value gems.

Tagliaferro says Aurizon Holdings Ltd (ASX: AZJ) continues to impress, saying the rail haulage company has very stable revenues with long-term contracts. 

"Obviously, the coal sector's doing very well, so its customers are doing very well, which helps when you're negotiating prices. And Aurizon has a very good management team."

While, on a trailing basis, not as cheap as the companies listed above, this ASX share trades on a modest 14.5 times earnings and a trailing franked dividend yield of 5.8%.

The post Amidst the ongoing tech stock wreck, value shares are everywhere. There's just one catch… appeared first on The Motley Fool Australia.

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Motley Fool contributor Bruce Jackson has positions in Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended ADAIRS FPO and Xero. The Motley Fool Australia has positions in and has recommended ADAIRS FPO and Xero. The Motley Fool Australia has recommended Aurizon Holdings Limited and JB Hi-Fi Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.