2023 will be a bumper year for stocks. Here’s how to play the rally

At the end of January, we made the argument that 2023 would be a bumper year for the stock market.

We were talking specifically about the S&P 500, but where it goes, the UK will follow. In fact the UK may even outperform.

A month and a bit on, let’s check in on that call.

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The UK’s a mess, the US’s best days are behind it, the economy, political division, political incompetence, the War in Ukraine, China, inflation - doesn’t matter. All that’s priced in. Is the market going up or down? The trend is your friend …

Why the S&P 500 could outperform in the year ahead

My main reasoning for the call was that we had what certain technical analysts call, “the Trifecta”.

First, we had the Santa Claus rally - that would be a rally in the S&P 500 over the week between 23rd December and 4th of January; then we had a positive first five days of the year, and then a positive January.

You don’t get these trifectas very often, but when you do, the portents are good.

“Since 1950,” says technical analyst JC Parets, “whenever the S&P 500 has completed the Trifecta coming off a down year, the stock market has never been down. And it's up almost 27% on average, more than three times the average annual rate of return for the S&P500.”

Add to that was the fact that this is the third year of the four-year US Presidential Cycle. This is normally a good year for stocks, the standard explanation being that policymakers are trying to get everyone in a positive frame of mind in time for the next election. The tough economic medicine tends to come in years one and two, and the expansionary policies in year three.

While years one, three and four average gains in the 6% to 7% range, with a 70% positivity rate, year three averages 16% with a positivity rate of around 85%. Very good odds.

Now the stock market is above its long and medium-term moving averages and they are sloping up. Ideal positive trend stuff.

There will be bumps along the way. We had one last month. Quite a big one in fact. The bears piped up. But, judging by the rally we saw towards the end of last week, the bulls spoke back. Now the bears seem to have the upper hand - Tuesday was not a great day.

Technicians will be pleased with the progress. The stock market was a little overheated. It corrected back to its 200-day moving average and then rebounded. I would describe that as a healthy pullback in an ongoing bull market. Now it’s consolidating.

The FTSE 250, which is probably a better barometer of UK stocks than the FTSE 100, has replicated the action in the S&P500. It had a great January, a rocky February, and so far it’s having an up-and-down March. It began the year at 19,100 and now we are at 19,825, so we are roughly 4% in the black for the year.

(The S&P 500 started at 3,820, and now we are at 4,050, so it’s outperformed the FTSE 250 by about 1%).

The FTSE 100 is more international in flavour than the FTSE 250, especially with so many energy and mining giants listed. It kicked off 2023 at 7,555 and today it’s at 7,900, so we are 4% to 5% - and just a few points off all-time highs.

If the world’s about to end, I’m not seeing it in the price action.

I’m standing by my call: we are on course for a good year in the equities markets.

How to play the 2023 stocks market rally

So how to play all this?

Be long equities.

If you haven’t the time or the inclination to seek out individual companies, you could go for investment trusts. One that I own in my ISA is Law Debenture Corporation (LSE:LWDB) the aim of which is to aim is to “achieve a higher rate of total return than the FTSE Actuaries All-Share Index Total Return through investing in a diversified portfolio of stocks.”

Similarly, Murray International (LSE: MYI) invests in global equities, with roughly 25% to North America, 25% to Europe and 25% to Asia, with the rest in the UK and in developing markets. Lots of energy, tech and healthcare holdings, but geared towards large cap and value plays.

Another option is simple tracker funds. There are so many to choose from.

Tracking the FTSE 100, for example, there are iShares Core FTSE 100 (LSE:ISF); the Vanguard FTSE 100 (LSE:VUKE) and HSBC FTSE 100 (LSE:HUKX).

With the FTSE 250 the same suspects offer options. For example, the iShares FTSE 250 UCITS ETF (LSE:MIDD) and Vanguard FTSE 250 UCITS ETF (LSE:VMID).

Similarly, for the S&P500, there’s the Vanguard S&P 500 (LSE:VUSA), the iShares Core S&P 500 (LSE:CSP1) and the Invesco S&P 500 (LSE:SPXP). (Be careful with US tracker ETFs, one way or the other they seem to get you on the forex).

Finally, there is always spread betting. This carries the greatest potential gains - but also the greatest potential losses.

Caveat emptor and manage your risk!