FOMO or FOLO: Which to worry about in 2023?

FOMO or fear of missing out is when a stock has risen strongly in price and then you buy because you fear that it will continue rising. This is driven by greed. Usually, the stock is overbought and due for a fall by that time.

FOLO or fear of losing out is when you own a stock and should probably sell it but you are afraid to because you're sure it will immediately start to increase as soon as you do. This is driven by fear. Usually, the stock is oversold by that time and may be due for a rebound.

Before I discuss 2023, let's recap 2022.

With 2 more trading days to go, the chance of a Santa Claus Rally is looking unlikely as I mentioned in my article below:

When there isn't a rally, the next year will turn out to be a bad year most of the time.

Many young investors have only started trading after 2008 and they have only known the bull market. Just buy the dips and they would make money. They think the Fed will stop hiking or cut rates in 2H2023 and then stocks will rally. Well, I'm a contrarian and believe the bull run is over and the bear market is upon us.

"Bottoms in the investment world don't end with four-year lows; they end with 10- or 15-year lows.”― Jim Rogers.

From that quote, famous investor Jim Rogers means that a financial crisis happens every 10-15 years and it doesn't end until the 10 or 15-year lows are reached. With inflation at a 40-year high and the Fed having to hike rates aggressively, conditions are ripe for a financial crisis similar to the 2008 Recession or 2000 Dot-Com Bust.

So I think S&P will be down for the 2nd straight year. Two consecutive down years are rare for major equity markets . This happened for the S&P on just 4 occasions since 1928. The scary thing is that when they do occur, drops in the 2nd year tend to be deeper than in the 1st.

I think there will be a recession and there may be a hard landing which last 2-3 years. This creates a very negative vicious cycle: Recession -> Job Cuts -> Lower Income -> Lower Spending -> Lower Profits -> Lower Stock Prices -> Rinse & Repeat. The most often used cure for lower profits is lower expenses. And that typically means deeper job cuts and the vicious cycle repeats leading to a weaker and weaker economy (and lower and lower stock prices).

The Fed has been aggressively raising rates since Mar 2022 and there has been noticeable reduction to high inflation only recently. But the job is far from done.

The same thing will be true about the delayed effects when the Fed wants to revive the economy down the road. The economy will not immediately kick back into high gear.

Here are 5 reasons why I think the markets will continue to be bearish.

The chart below shows the correlaton of high inflation with recession (grey bar) and bear markets:

Notice that high inflation had led to recession most of the time. The thickness of the bars denote the duration of the recessions.

The consistency of this indicator explains why so many analysts think that a recession is imminent. Remember that the only way to have lower rates for the long term than the short term (i.e. inverted) is to predict a recession in the future that brings down future rates.

It is also severely inverted. Many recessions occurred with much lower inversion readings. So the odds of a recession soon are high.

All of the last eight recessions happened when the Chicago Purchasing Managers' Index (PMI) report came in below 40. Note that a reading below 50 indicates a contraction. Chicago PMI for Nov came in at a shocking 37.2! This indicates that a recession is imminent.

The earnings outlook has worsened since the last earnings season. Analysts are also predicting negative earnings for 1H2023.

A 10% growth in earnings is the standard and a 6% drop is quite bad. The average recession typically brings about a 20% drop in corporate EPS. That level of damage is not currently being factored into stock prices. And hence if a recession is imminent with much steeper earnings losses, stocks will likely drop another 15-20% or more.

Jerome Powell made it clear that the dangers of long term high inflation to the economy are much worse than those posed by a recession. So to tame high inflation, the Fed is hiking rates even if they cause a bear market and recession.

A financial crisis may last 2-3 years and prices may fall 50% to more than 90%. Some companies will also go bankrupt. Given such a bearish outlook for 2023, which strategy should we take? The answer is somewhere in between. Stocks have some room to fall, so I question the wisdom of doing DCA or picking up shares. Just like 2022, the bear market will not fall continuously. There will be some bear rallies and I will be trading those rallies.

If you are able to catch near the bottom of the bear market, then it would be a great money- making opportunity.

Please give me a like if you find my analysis insightful. Thanks.