Market forecasts are stupid. We all learned that a long time ago. But that doesn’t mean they’re completely worthless. While predictions are almost always wrong, they can be entertaining and educational. That’s all I’m trying to do with this post. entertain and educate. Needless to say, but I have to say it anyway, nothing on this list is investment advice. I don’t do anything with my portfolio based on these predictions, and neither should you.
Here is my list from a year ago. I got some things right and a lot wrong, which is hardly a surprise. I expect my predictions to have a terrible track record and so I try to ride the market rather than outsmart it. Why do I do this? Well, it’s fun to look back on what you thought was possible a year ago. Seeing yourself so wrong about some things reminds you how difficult it is to predict the future. I also learn a lot in the process. I discovered some things I didn’t know or forgot I knew. So these are my ten predictions for 2023.
- Bonds are asserting themselves as a diversifying asset
- Tech continues layoffs
- Jeff Bezos is returning to Amazon
- The IPO market remains frozen
- Value again outperforms growth
- Gold hits a new all-time high
- The housing market is not crashing
- Outperform international equities
- Crypto is going nowhere
- Energy stocks continue to outperform
- Bonus. Market avoids recession and stocks are up double digits.
Bonds are asserting themselves as a diversifying asset.
I usually think that even if you got the news ahead of time, you wouldn’t know how the market would react. 2022 was the exception. If you had known ahead of time that inflation would do what it did and that the Fed would raise rates seven times to fight it, you would have done a lot of things right.
Inflation is toxic to bond investors for two reasons. It inflates the value of the fixed income security and depresses the price of that instrument as interest rates rise in line with consumer prices. The past year has been brutal for the bond market, and to make matters worse, it happened in a year in which stocks were also crushed. US bonds have historically done well when stocks have faltered, but the past year has proven once again that there are very few ironclad rules in finance. That’s not physics.
The average annual bond yield since 1976, when the S&P 500 fell for the year (N=8), was 6.7%. Bonds have been positive every year, stocks have fallen except for the last year when rising yields (lower bond prices) combined with higher prices drove stocks lower.
The 10-year Treasury bond rose from an all-time low in 2020 to its highest level in over a decade in a relatively short space of time. That was painful, but the good news is that we got through it. You can’t go back from 50 basis points to 4% next year. So if stocks have another tough year, bonds should do well. Even if interest rates go up and prices go down, at least we have the fixed income component to cushion the blow.
Tech continues layoffs
When Facebook bought Instagram for $1 billion, the company had just 11 employees. Almost a decade later, there are 20,000. ‘
One of the most impressive parts of the tech boom over the past decade is the amount of bottom-line revenue that has flowed in. That all changed in 2022, as outlined here interesting thread by Jesse Livermore. It shows that FANMAG’s underperformance is largely due to margin compression. With headcount growth exploding in recent years, the tech layoffs we heard about in 2022 will continue into 2023 at all levels, from startups to established companies.
What Elon Musk did on Twitter will serve as a blueprint for 2023. It won’t be as extreme as what he did, but it will give the green light for other companies to follow similar steps. Last year, 1,013 tech companies laid off 153,160 employees. This trend will continue in 2023.
Jeff Bezos is returning to Amazon
Amazon experienced its biggest annualized share price decline since the dot-com bubble burst.
Yes, Amazon has seen worse declines, but when it peaked during the dot-com bubble on its way to a more than 90% decline, it had a $36 billion market cap. It lost more than $30 billion over multiple days in 2022 and lost $840 billion this year alone. It’s hard to compare this company to what it was back then.
Jeff Bezos spent 27 years at Amazon and is less than two years away. In 2023 he tows a Bob Iger and returns to stabilize the ship.
Value again outperforms growth
After a decade of gaining in the doldrums, value stocks shone brightly in 2022. I didn’t remember that, but in 2021 small stocks dominated small growth and posted their biggest year or outperformance since the dot-com bubble burst.
While small value’s outperformance over small growth is near an all-time high, its large-cap brethren still have a long way to go. This trend will continue in the coming year.
The IPO market remains frozen.
Just 37 companies went public in 2022, raising a meager $7 billion. This is the weakest activity since the $4.3 billion raised in 1990 and a 94% slump from a year earlier.
In 2021 there were fifteen tech IPOs that raised $1 billion. That number dropped to zero in 2022. This number will remain at zero in 2023. It is difficult to provide risky assets to the market when risk appetite is low.
Gold hits a new all-time high
It’s hard to believe, but gold hasn’t outperformed inflation since the 1980s.
Real yields will stay below their peak, but nominal yields will not. Gold breaks out and hits a new high in 2023.
Gold has fared much better lately, ending 2022 on a six-month high. Gold has disappointed in this inflationary environment and has not kept pace since 2021. But that’s because gold is quoted in dollars and the US dollar has been on course. When you look at gold in comparison to other currencies, things look even better. These killer charts out JC Paint a clear picture of where the trend is.
The housing market is not crashing
It would be easy to argue that a massive fall in house prices is underway. Finally, if new home sales return to their median price in 2019, that would be a 32% drop, which would be deeper than what we saw during the Great Financial Crisis.
But I don’t see that happening. The imbalance between supply and demand is structural, as buyers outnumber sellers by a multiple. You can see activity picking up again as interest rates have come in for the past few weeks. Unless interest rates shoot back up to 7%, home prices will cool, but they won’t crash.
Outperform international equities
Diversifying away from US equities has been very painful for a long time. The S&P 500 has outperformed international equities (ACWX) by 52% over the past five years and 160% over the past decade.
This may surprise you, but the S&P 500 has actually underperformed the rest of the world over the past year, at least in local currencies. But when you add the wrecking ball, the dollar, the gap narrowed dramatically and in some cases reversed.
The S&P 500 has outperformed in eight of the past decade. But with the dollar far from its highs and global stocks more of a value (less technology-heavy) composition, expect them to have their best year since 2009 relative to the S&P 500.
Technically, international stocks are also looking better. The chart below shows that the ACWX/SPY ratio is further above its 200-day moving average than at any point in the past decade.
Crypto doubles in 2023
It’s hard to promote an asset class that feels like it comes with career risks. With all the negativity surrounding the space right now, I’m amazed that Bitcoin isn’t currently below 10,000. And maybe the cops can hang their hats/hopes on that.
Cops will say we’ve been here before. Looking at the drawdown chart, yes, prices have seen these types of declines before.
But in every other decline, crypto has only been a marginal asset. It still is, but you know what I mean. Just as only crypto natives experienced previous drawdowns. So this time is very different as buyers who got in during the last bull run have been wiped out and in many cases will never come back.
Crypto is an asset built on belief and trust, and both are at all-time lows. So how do you recreate a hype cycle after what we just saw? And with the backlog of what’s happening with DCG and the questions surrounding Binance, it’s hard to be optimistic here. Especially as the Fed continues to drain liquidity from the system. Right now, crypto is little more than a high beta asset on steroids. Wait, did I predict Cryptpo to be halved again, because that’s what it sounds like. I agree!
No, but seriously, this seems like the most unlikely prediction on this list and one that few are positioned for. Crypto will double in 2023.
Energy stocks continue to outperform
Energy will be the first sector Dreipeat since health care 1989-1991.
Despite the impressive run Daniel Sotirov shared this chart showing that energy stocks are not only highly profitable but also very cheap.
Energy stocks that fell below 2% of the overall market at their lows will end 2023 above 7% (currently 5.2%).
Bonus. Market avoids recession and stocks are up double digits.
2023 will be very similar to 2022 in the sense that macros will dominate. The biggest risk is hidden in plain sight, and it is over-tightening in a slowing economy. With hopefully the inflation spike behind us, a consumer still in good shape, and an investor class consistently negative, it wouldn’t take much of a surprise for stocks to take flight.
Predictions are only stupid if you take them seriously. Especially if you take your own predictions seriously. These are my best guesses as to what will happen over the next year, and I look forward to reading them again in twelve months, incredulous that I could be so wrong about so many things. I hope everyone has a happy, healthy, safe and prosperous New Year.