Kar Yong Ang, Financial Markets Analyst, OctaFX
It has been a dizzying year for the stock market, between global uncertainty, high inflation, and rate hikes. With inflation still uncomfortably high and more rate hikes on the horizon, the market could be in for a bumpy ride in 2023.
You are probably wondering, “What next?” This is a guessing game, at best. Any fund manager or investor who tells you they know what is going to happen is being disingenuous. But if there is one guaranteed constant you can count on in the stock market currently it is volatility. This volatility will bring opportunity to investors aiming to benefit from the twists and turns of stock market.
The volatility opportunity
Over the course of 2022, we have seen broad market indexes decline, and many primary sectors have reported negative returns during Q2–Q3 2022.
The fourth quarter of 2022 is looking to be a calmer quarter, but still filled with volatility and uncertainty.
We do not anticipate much change in market volatility over the next six months since the threats to economic growth remain the same as for this year– namely, the war in Ukraine, the energy crisis in Europe, global inflation, and supply chain issues, as well as multiple climate disasters.
For fund managers and DIY traders, this presents a remarkable opportunity to make outsized returns, particularly those sophisticated using derivatives such as contracts-for-difference (CFDs) to benefit off the price movements of stocks, whichever direction they move.
Benefitting from the ups and downs
With traditional trading, traders are buying a stock in the hope that its price will rise later, enabling them to sell at a profit.
In contrast, when trading CFDs, traders can take advantage not only of rising, but also of falling market prices. This can be beneficial when trading in today’s highly volatile markets.
Trading in this way offers a chance to make money from falling markets, rather than having to hold onto investments long term until markets rebound. CFDs can also be traded on *leverage, which enables traders to boost their market exposure and trade bigger volumes for a small initial capital.
The 2023 outlook for the stock market?
The stock market could be set up for another rocky year in 2023 if initial earnings estimates are anything to go by. The biggest banks, including Bank of America, foresee 0% earnings per share growth for the S&P 500. If a recession hits, its expected EPS could fall by 11% on average.
Over the long-term, corporate earnings growth and stock prices have a direct relationship, so if earnings are not growing, there is a good chance that the stock prices will not either, at least until the outlook improves.
In a weak macroeconomic environment, the cyclical sectors such as technology and consumer discretionary are under a negative spotlight and tend to underperform the wider market in falling markets.
Conversely, we anticipate defensive and value stocks within the utilities, natural resources, and consumer staples sectors to be less volatiles in the low growth and higher rate environment.
In any case, diversifying your stocks across different geographies and sectors will decrease company-specific and systemic risks of your portfolio.
Enjoy the ride
We believe the current drivers of the global economy will persist into 2023. U.S. inflation is still uncomfortably high, and the U.S. Federal Reserve (Fed) will probably continue to increase interest rates in the first half of 2023. The U.S. bond market yield curve has inverted, signalling a probable recession. Thus, earnings growth will almost certainly slow and the bear market in the S&P 500 will likely persist in 2023.
Furthermore, there are additional geopolitical risks like the war in Ukraine and tensions around Taiwan, not to mention rising COVID cases in China, which might lead to nationwide lockdown and provoke a sharp drop in demand for many commodities.
The U.S. stock market index has already had its worst year in more than a decade. However, there are positive signs as well. Dramatic declines in valuations are often followed by a sharp reversal of the trend.
Indeed, if you take a long-term view, 2023 may provide an excellent buying opportunity. However, more volatility should be expected before the bottom is reached. Traders and fund managers should be ready for many up and down moves. Such an unstable environment offers great opportunities for shorter term traders as they can profit by being both on the short and on the long side of the trade.
End
*It is important to note that trading on leverage can come with increased risks. This means that a trader using leverage to multiply a trade by 10 also risks losing 10 times his or her initial outlay. To minimise losses, traders can make use of hedging, a strategy that involves offsetting one’s trades with opposite positions. For instance, a trader buying a particular share can also short a CFD with the same share as its underlying asset. If the share price falls, the loss is compensated by the amounts earned from the CFD.
