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Despite markets falling in 2022, investors are looking ahead and many see a relatively attractive climate if investors can think long-term rather than buy into the moment. Individual pockets of the market may perform well despite a larger economic downturn and may produce investors, as opposed to short-term traders, for years to come.

But unless the Fed holds off on raising interest rates, that may be more of what the 2022 market has to offer.

“Stocks, tech stocks, and cryptocurrencies have all gone up this year,” Sawney says. He expects 2023 to “move along a similar path until the recovery begins.”

It’s important not to let financial media and short-term news distract you from long-term opportunities, says Josh Answers, host of the Trading Fraternity YouTube channel. “Look at the basics and stick with what you know and have studied,” he says. “The news media is always late to the party, so do your homework and expect moves in the market.”

And when the economy weakens, it can be a good time to steer clear of retail and leisure companies, which are sensitive to economic cycles, said Mina Tadrus, managing director of Tadrus Capital, a high-frequency trading hedge fund. “The pandemic has already had a significant impact on these sectors, and a potential downturn could further damage their performance,” he says.

What types of stocks can outperform in 2023?

Here are some areas where investors may see opportunities in the coming year.

Qualified companies

“The market may or may not have fallen further, but the long selloff in quality assets is irresistible,” says McBride.

And the focus here is on quality companies that can not only survive the recession, but actually thrive by expanding their competitive advantage. In contrast, weaker or heavily indebted companies may decline as economic conditions worsen.

“Remain focused on long-term strategies that seek to capitalize on innovative and growing businesses that help drive the digital transformation of all enterprises,” said Gary Frigon, president and CFO of Taylor Frigon Capital Management.

Value shares

Value stocks are another notable area to outperform, as has happened during rising prices or falling markets. “Investors are so used to stocks outperforming value, but 2022 provided a strong lesson on which stocks and sectors tend to thrive in a rising interest rate environment,” Keller said.

He expects bond yields to continue rising from here, meaning value stocks could continue to outperform.

“We don’t think the 10-year Treasury yield has seen its peak for the cycle yet, and that should lead to continued strength in equities over growth stocks,” Keller said. “Investors haven’t seen an environment like this in decades.”

Technical stocks

Technology stocks were among the worst-hit stocks in the market, with even stocks like Amazon down more than 50% from their all-time highs. The tech-heavy Nasdaq is down more than 30% from a 52-week high, and its most important components, such as Apple and Microsoft, are well below their annual highs. But such setbacks provide an opportunity to move forward.

“The software is likely to do well when interest rate hikes subside and the long-awaited ‘recession’ either happens or it doesn’t,” says Frigon. “It’s hard to find an area that has better growth now or in the future than that area.”

Keller agrees. “If and when the market bottoms out in the first half of 2023, we view the technology as a fantastic long-term opportunity given the significant drawdowns since late 2021.”

Tadrus also believes tech stocks could do well in 2023 after being long-term winners over the past decade. He also believes that health care and utilities could do well because they “tend to be relatively stable and less vulnerable to economic downturns.”

Small cap stocks

Small-cap stocks are usually among the first stocks to take a hit when investors catch a whiff of a recession. Their smaller size and lower financials make them a riskier proposition compared to large-caps. But it is important to look closely at the opportunities here, as small stocks have the potential to grow at a higher rate and provide better returns for investors.

“Most investors allow momentary pessimism to get in the way of recognizing the excellent value that exists in many small and medium-sized companies,” says Frigon.

Picking a few good small caps can lead to big returns for years to come.

How should investors navigate a potentially rocky 2023?

Many investors view the first six or nine months of the year and the concurrent recession as a slow period that creates better returns for investors later in the year.

“We feel that going into the fall, the stage will be set for a strong recovery from the cyclical bear market of 2022-2023,” says Keller.

But even if that stock recovery falls through 2024, the market’s decline simply gives long-term investors more time to sell their investments at lower prices. “Most experienced investors find opportunities to build long-term wealth in bear markets,” says Raju.

Here’s how experts say to navigate the market in 2023.

Think long term

Investors should look past today’s doom and gloom and realize that today’s low prices will likely be seen as good deals in just a few years.

“This is a great time to invest because valuations have come down to more reasonable levels,” says McBride.

While the market may be rocky in the short term, even through 2023, investors looking to get out three to five years out should be handsomely rewarded over time.

Go slow and steady

“The best way to invest in this type of market is with a small amount of money,” says Josh Answers.

Wealth is built over time, so investors must remain disciplined. For many investors, this discipline involves regularly adding money to the market using a process called dollar cost averaging, which helps you avoid the risk of putting all your chips on the table at the wrong time.

“The stock market has been down 15% to 20% for months, so for investors who are dollar cost averaging, you’re still effectively buying $1 bills at 80 to 85 cents,” McBride said.

By investing regularly, you can avoid buying at too high a price, but also focus on adding to your investments when they are lower, ensuring better returns for years to come.

“A lot of people are scared right now because of the volatility, but that shouldn’t scare you if you invest small and often,” says Josh Answers. “Slow and often, once a month, has kept us alive in this market.”

Stay invested

You can’t get long-term market returns unless you stay invested, but that’s exactly what’s hardest to do when stocks are down. However, it is vital to invest.

“You want to stay fully invested and maintain your regular investments because at some point this market is going to start to recover, and that’s when the headlines are still pretty ugly,” McBride says. “You want to be on the train and not on the platform when it pulls out of the station.”

One way to help yourself is to take a passive approach to investing, helping to take your emotions out of the game. Set up your account to buy stock or index funds on a regular basis, then don’t even look at the market.

“As a proponent of ‘set-and-forget’ passive investment strategies, the fear of bubbles and downturns is not cause for alarm,” says James Beckett, financial coach and writer for the personal finance website “Market timing is simply not part of a passive investing philosophy.”

Coincidentally, that’s the same approach advocated by legendary investor Warren Buffett, who advised most investors to invest regularly in an S&P 500 index fund.

Bottom line

Many market watchers expect 2023 to be a tough time with a lot of volatility. But whether it’s easier or tougher, investors have some proven long-term investment strategies that can help them beat that market. And even if 2023 ends up being another tough year for investors, it’s likely to set up a stronger recovery for next year, meaning now is the perfect time to invest more at lower prices in anticipation of a return.

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