In October, mounting inflation rates scared investors from the stock market. That point of maximum fear sent the S&P 500 to a “double bottom” that month. After washing out fearful investors, those who stayed invested booked a 17% return from the bottom.
Markets likely bottomed because it is pricing in multiple peaks. Investors expect interest rates will rise at a slower pace. The Federal Reserve will set a Fed Fund’s rate at around 5%. When the market digests the high borrowing costs, the central bank will continue increasing rates until the economy slows.
To achieve a slowdown with maximum employment and lower inflation rates is nearly impossible. Still, the market’s incredible bounce from the lows suggests otherwise.
Investors who sold their SPY ETF at the bottom may have FOMO – fear of missing out. After the rally, FOMO investors are better off waiting out the current rally.
Avoid sectors damaged by the higher interest rates. Real estate and construction firms will fare the worst next year in 2023. Technology stocks that post slowing growth will not perform well, either.
In the financial sector, banks like TD (TD), Bank of Montreal (BMO), and Bank of America (BAC) in the U.S. should post strong profits. High interest rates lift interest income from deposits. Conversely, fintech has lower assets to monetize. Avoid them.
