The S&P 500 is off about 19.1% this year (as of Dec 8, 2022). The year, so far, has been caught up with high inflationary pressure across the world due to supply-chain issues, the Russia-Ukraine war, high energy prices, a commodity super-cycle, a super-hawkish Fed, rising rates across the globe as central banks have been tightening policies to rein in inflation, risk-off trade sentiments and a global market crash.
The index even witnessed the worst start to a year since 1939. The index has lost about 18% in the first half while the second half of the year has put up much better performance as the index has lost just 2.4% so far (as of Dec 8, 2022).
U.S. GDP Growth
The U.S. economy grew an annualized 2.9% on quarter in Q3 of 2022, better than an initial estimate of 2.6%, and beating forecasts of 2.7% reflecting upward revisions to consumer and business spending and net trade. Monthly job growth has averaged 392,000 thus far in 2022, compared with 562,000 per month in 2021.
U.S. Inflation
The annual inflation rate in the United States slowed for a fourth month to 7.7% in October, the lowest since January, and below forecasts of 8%. It compares with 8.2% in September. Energy cost rose 17.6%, below 19.8% in September, due to gasoline (17.5% vs 18.2%) and electricity (14.1% vs 15.5%). Throughout 2022, inflation has hovered around a 40-year high level.
Fed Rate Hike
Notably, the Federal Reserve hiked the target range for the federal funds rate by 75bps to 3.75%-4% during its November 2022 meeting to contain inflation, marking a sixth successive rate hike and the fourth straight three-quarter point increase, pushing borrowing costs to a new high since 2008. This has weighed on the markets mainly. However, the Fed may slower the rate hike momentum in the coming days as inflation is showing signs of cooling.
What’s Waiting for 2023?
CNN’s Fear and Greed Index are currently in the “greed” category. This points toward a likely upbeat momentum ahead. Several research houses like Bank of America, J.P. Morgan and Goldman Sachs predict a recession in 2023. Stocks may be down 24% next year, Bank of America says, as quoted on Market Insider.
Morgan Stanley expects the S&P 500 index to be at 3900 levels at the end of 2023, almost at the same levels as in November 2022, as quoted on Financial Express. Earnings, according to the Morgan Stanley report, will hold the card in keeping the index busy all through 2023.
In any case, estimates for full-year 2023 have also been coming down. Construction, Retail, Discretionary and even Technology have already gotten their 2023 estimates shaved off a fifth since mid-April.
Per Zacks Earnings Trend issued on Nov 23, 2022, the S&P 500 earnings are expected to record 2.8% in 2023 while revenues are likely to log 2.3% gains. The projected rates follow 4.8% earnings and 10.3% revenues growth in 2022.
ETFs to Watch
Against this backdrop, investors may track S&P 500 ETFs like Vanguard S&P 500 ETF (VOO – Free Report) , iShares Core S&P 500 ETF (IVV) and SPDR S&P 500 ETF (SPY).
Investors can also play the growth part of the index with SPYG and the value part of the index with (SPYV – Free Report) . SPDR Portfolio S&P 500 High Dividend ETF Fund SPYD is a good bet for the dividend plays of the index. SPYD yields 3.98% annually.
Investors can also bet on leveraged S&P 500 ETFs like Direxion Daily S&P 500 Bull 3X Shares SPXL, ProShares Ultra S&P500 (SSO – Free Report) and ProShares UltraPro S&P500 (UPRO – Free Report) while the index is on an uptrend.
If the S&P 500 index shows a declining trend, then investors can play ProShares UltraPro Short QQQ (SQQQ – Free Report) , ProShares Short S&P500 (SH), ProShares UltraShort S&P500 (SDS – Free Report) and ProShares Short QQQ (PSQ – Free Report) .
Read More: How S&P 500 ETFs Fared in 2022; What’s Waiting for 2023? – December 13, 2022