Opinion
Why sharemarkets could soar this year, despite an ‘inevitable’ recession
By Michael Gable
What can the Australian sharemarket do in the next 12 months? After a negative 2022, the consensus view is that there is more downside ahead, with an inevitable recession causing stock prices to head lower.
Many market commentators suggest that it is now best to park your cash in the bank. But what if the consensus is wrong? When it comes to sharemarket investing, the best opportunities occur when the consensus changes its view, as when everyone crowds into the same area, the movement out of that area is what produces oversized returns.
After a negative 2022 for sharemarkets, the consensus view is that there is more downside ahead, but that may not be the case.Credit: AP
I believe because most investors believe that a recession and sharemarket decline is inevitable, we need at least be open to the fact that this does not occur.
There was a high degree of uncertainty in 2022. Inflation was still climbing and multiple interest rate rises lay ahead of us. Though there are currently fewer question marks around inflation and interest rates, there have still been a few concerns on the bearish side of the ledger.
However, as we move through the year, we have been able to tick these off our list as the market continues to climb a wall of worry. Inflation has peaked and is trending lower. Interest rates are peaking, and the bond markets are pricing in rate cuts later this year.
Moreover, bank failures in the US did not lead to a crisis, US company earnings have not fallen off a cliff, and the US debt ceiling did not crash markets. As we brush off one potential market-destroying event after another, we move on to something else to worry about.
There has been some soft economic data recently, but it is important to look ahead and not in the rearview mirror. Lagging data has been soft, but we are also seeing, on balance, a bottoming out in the data. This means that we need to look forward towards an eventual economic recovery.
This is what the sharemarket is doing, it is looking at what lies ahead of us, not what is happening today. Unlike prior downturns, the sharemarket peaked early in 2021 before interest rates went up. It also appears to have bottomed early in 2022.
Some of the best sharemarket returns occur when economic activity starts to pick up again and recover after a downturn, which is precisely where we are now in the cycle. Although the market is moving higher, there is plenty of cash that is still not being deployed. Short positions remain near record levels, and fund manager surveys show extreme bearishness.
This is a similar situation to what we saw after the COVID-19 lows in 2020. The sharemarket started to rally at the end of March and did not look back. Whilst everyone remained in lockdown, the consensus view was that the rally did not make sense and sharemarkets should have another dip ahead of them.
When it became evident that this was not going to happen that cash provided extra fuel to the fire. In the US, the S&P 500 was making new all-time highs only six months after the COVID lows. It did not make sense at the time, and I believe that the market could find itself in a similar situation again.
There is a chance that the back half of 2023 could see the sharemarket head higher, not lower. I believe that the Australian sharemarket could be making all-time highs within the next 12 months. No-one else is saying it, not many are expecting it, which is why you need to at least be open to the idea.
You may find more comfort being crowded in with the consensus, but sitting with the consensus view will not set you up for the big movements that lay ahead. When everyone is crowded onto one side of the boat, you are often better off moving to the other side.
Michael Gable is the founder of Fairmont Equities.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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