Forecast 2023
While we are talking about forecasts, this is a good time to explicitly make one for 2023.
For investment purposes I assume that my forecast has only a 50% chance of occurring, and that the consensus will be correct 50% of the time.
Let’s start with a GDP forecast for 2023:
My forecast in the consensus for Q1 and Q2, but then I forecast a -5% GDP for Q3 and Q4, with the recession continuing into 2024. Why?
I still think Q3 and Q4 of 2022 had more “pent up demand” than most economists believe
I think small business is in a complete crisis, a variable that economists always underestimate
I fear a credit crisis in commercial real estate that nobody is talking about
My 2024 and beyond GDP forecast is heavily dependent on a political forecast for 2024. I see Biden and Trump as unelectable. I fear a younger Democrat from the far left, but am encouraged that DeSantis could be a supply-sider.
My inflation forecast is for below 2% for the second half of 2023. I have said repeatedly, “the depression will cure the inflation”. My interest rate forecast is for the Fed to reverse course in mid-2023, but it will not help. They used to call this “pushing on a string”
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My forecast is for another -20% year in 2023 for the S&P 500, about the same as 2022. I think this decline would get us in the vicinity of fair value.
I have no confidence in using 2022 earnings to estimate the S&P 500. There are just too many moving parts in that number. Energy earnings and cyclicals distort the number. So I have a different “back of the envelope” method.
Let’s try value the most consistent non-cyclical company we can think of , and use that as our proxy for the market. I nominate Colgate-Palmolive (CL). I have watched this stock for 40 years and it still the same company. It grows at a moderate but steady pace and has a clean balance sheet. It is a global franchise and is completely non-cyclical. Let’s value CL:
I hesitate to value most companies using EBITDA, but I have less of a problem using this method for companies that require few capital expenditures like CL. Here is a very rough method, that I have heard several smart CFO’s advocate over the years for what they are willing to pay for acquisitions:
4x EBITDA for the most troubled of companies
6x EBITDA for average companies
8x EBITDA for solidly above average companies
10x EBITDA for great companies that have deep “moats” around their business
12x EBITDA for the very best of companies
I would argue CL would qualify as either 10x or 12x, but let’s round up and say 12x
CL has 2023. EBITDA of about $5.50/share and net debt of $8/share, so the simple math is (12 x $5.50 ) - $8 = $58/share = fair value of Colgate
CL currently sells for $80, so a 20% decline puts it near “fair value”.
This might seem like a strange way to value the average stock, but I think it is more accurate than dealing with the volatile earnings of financials, industrials, and energy.
For 2023 I would take the 4% yield of the two year treasury bond, rather than the average stock.
So why build a model stock portfolio?
Even if the market is 20%+ overvalued, most investors will own some stocks
Institutional investors usually have to own stocks, and cannot go to cash
The crashes of 1987, 2001, 2008, and 2020 have taught me that you have to be prepared when the bottoms occur. It is too late to start doing your work at the bottom, the bottoms do not last very long.