2023 will be a year of opportunity…
But there’s good news and bad news.
The good news is that investors will have a chance to buy high-quality companies at dirt cheap prices.
The bad news is that in order to get to that opportunity, the bear needs to take at least one more swipe at the stock market… meaning stock prices will go lower.
So, the first half of 2023 is likely to be turbulent…
A few weeks ago, we looked at the long-term monthly chart of the S&P 500 and concluded that it had a bearish look to it. The market is vulnerable to a “waterfall” decline in the months ahead.
Today, we’ll take a look at another long-term chart that supports this theory.
Here’s a monthly chart of the 10-year Treasury bond yield curve…
This chart shows the difference in yield between the 10-year Treasury note and the three-month T-bill. Most of the time, the yield curve is a positive number – the further you go out in time, the higher the yield.
A negative yield curve – where short-term bills offer a higher yield than long-term notes – often occurs prior to an economic recession.
Indeed, the first three blue arrows on the chart occurred just prior to significant declines in economic activity.
They also occurred just prior to significant declines in the stock market.
In fact, when the yield curve reached its most negative levels, stocks were closer to their bull market highs than they were to their bear market lows.
By the time the bear markets ended in December 2002 and March 2009 – and by the time the COVID-inspired sell-off ended in March 2020 – the yield curve was well off of its lows, and well into positive territory.
If the current situation plays out similarly, then the current bear market in stocks is unlikely to end until the yield curve is well into positive territory.
Readers will note that the yield curve is more negative today than at any other time in the past 30 years. So, we’re still at least a few months away from the end of the bear market.
But that’s not a bad thing…
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You see, bear markets are good.
They correct the excesses that build up in the final stages of a bull market – when too much money chases stock prices higher and pushes valuations to unsustainable levels.
Bear markets are painful to those who are overly exposed, or perhaps even leveraged, to stocks.
But they create amazing opportunities for cash-rich investors who’ve been waiting patiently for a chance to put money to work in the stock market.
The problem is – as the old Wall Street adage reminds us – when it’s time to buy, you won’t want to.
It’s hard to buy stocks when they’re falling. It’s hard to buy when everyone else is selling, and when all the financial TV talking heads are preaching gloom and doom.
Most folks become paralyzed. They do nothing. And they let those amazing opportunities pass them by.
Don’t do that.
Take advantage of bear markets. Have the courage to buy stocks when they go on sale… when they’re trading at historically cheap valuations.
Don’t worry about trying to buy stocks at their absolute lows. Nobody does that consistently.
But if you can buy good quality companies at valuations far below their historical averages, then you’ll profit over time.
Bear markets give you the chance to do that.
We’ll likely get that chance sometime in the first half of 2023.
Best regards and good trading,
Will you be buying more stocks this year? Or will you stay on the sidelines for a bit longer?
Let us know your thoughts – and any questions you have – at [email protected].