What Does 2023 Hold For Markets – Some Best Guesses!

Blain’s Morning Porridge – 14^th December 2022: What Does 2023 Hold For Markets – Some Best Guesses!

“The art of war is about guessing what’s on the other side of the hill…”

This morning: I’ve no idea what might happen in 2023, but I don’t think its going to be as bad as some expect, but neither will it be as rewarding as others predict. Its likely to be another year of trading on what the mood is, what the numbers mean, and hoping to call it right. Hope, as they say, is only a strategy when you simply don’t know!

Some thoughts on 2023…

Around this time of year every financial pontificator and prognosticator is expected to present predictions for the coming year. I could go tearing the entrails from birds, or try reading the cards, but experience teaches the best we can do is guess, and then carefully dress it up and hedge these guesses to present them as informed advice – but that’s not what readers are looking for. Readers generally want insights and ideas…  so here is my best advice for dealing with 2023:

Forget everything you ever thought you knew about economics and your perceptions of current markets!  (That might just be the best piece of advice I ever give.)

Chuck everything you think is sacrosanct in the bin… and start again. Do so, and the current contradictory markets and theoretical economic morass might just make a little more sense. Break it all down, and reconstruct the bits and pieces to make sense of your own perceptions! (Remembering, of course, to spice it with plenty of self-doubt.)

Never forget, the biggest danger to markets is people. The market, after all, is just an enormous voting machine weighing up the votes of every participant. Things get difficult when everyone is pessimistically careful – causing the prices to become overly depressed – hence the smart money says be fearless when others are fearful. Things get really dangerous when market participants are optimistically careless – causing prices to soar to euphoric levels. Know the mood and trade accordingly.

We still seem trapped in a phase of overoptimism – with investors jumping on any positive news to validate their hopes the market will go higher – after all, that’s what they have been doing since 2009, so surely they can only ever go up. Nope. Yesterday’s lower than expected US CPI print yesterday pushed prices up (for a while) and any hints of a Fed “pivot” to lower rate rises – when the Fed hikes by 50 bp rather than 75 bp later today – will push stock markets higher.

If you want an example of over-optimism in the face of reality, it’s the high likelihood the market is ascribing to Central Banks being able to navigate a genuine Soft-Landing.. Why? They have never, previously succeeded. Every known instance of economies over-heating and rampant inflation has been followed by a crash of some description as central banks either let inflation run on too long, or engineer an economic crisis by hiking rates too hard.

I happen to believe there is no such thing as a soft-landing… but a good landing is one you can walk away from. (A perfect landing is one where you can still fly the plane the next day!)

The expectation a damaging recession can still be avoided next year is strong across markets. I don’t want to sound grumpy – but I still think recession is going to happen, because rising rates, property sentiment dipping, and inflation leave consumers unhappy and nervous – and not buying. For consumer societies to thrive we need more, not less consumption! They spend even less when faced with tax rises, austerity spending, declining services, rabid inflation, industrial strife and ongoing political sleaze. It’s a recipe for economic misery, and next year Stagflation, in the UK, looks nailed on.

To see where we are going, look back to where we have come from…

2022 was a watershed year. The third exogenous shock of the decade; the Ukraine War and Energy Price Shock, followed Covid in 2020 and Supply Chain Disruptions in 2021. We also have a critical endogenous shock underway – Quantitative Tightening as global Central Banks seek to unroll the effects of monetary experimentation in the 2010s.

You also have to understand the key economic factors that drove markets and inflation through the 2010s. The first was monetary experimentation – keeping interest rates low to drive economic recovery following the global financial crash of 2008. But we didn’t get an economic boom – what we got was galloping financial asset inflation as bond prices and stock prices went stratospheric. That distortion enflamed market exuberance and euphoria, triggering the stock market bubbles in Big Tech, disruptive tech and the stupidities of meme-stocks, crypto and NFTs.

At the same time we had the second factor, a de-facto cap on global inflation: China. The Middle Kingdom became the “cheapest to deliver” manufacturer exporting deflation around the globe, and all supply chains led back to it. Covid and the building stag-fight between China and the USA (geopolitics) profoundly changed that reality – unleashing supply chain price instability as geopolitics changed and shut off the deflation spigot.

The era of a) cheap money fuelling markets and b) downwards pressure on prices is absolutely over. Make sure you understand the a new reality of real inflation and expensive money before figuring what next year looks like. Although the indications are for inflation to moderate on energy prices normalising – I reckon it will prove stubbornly high and difficult to defumigate from Western Economies.

Let’s scribble down some possible scenarios and predictions for 2023:

My starting point would be to worry about further shocks: what about another exogenous shock?.

• Could Covid in China overwhelming the medical services create a judder moment triggering another China shutdown, making the government look weak, causing the possibility of a deeper global recession, and the possibility President Xi decides to deflect by going outward bound on Taiwan?
• Could the Bird Flu that’s ravaged Christmas turkey’s jump species and lead to a second major pandemic?
• What are the chances Central Banks decide to go soft again, and turn market accommodative – slashing rates to avoid market meltdown and a deep recession?

These are all known unknowns – and none of them are binary. There are multiple others we could talk about including political instability across the west, the dollar, and the great retirement causing a demographic crisis in the jobs market, and thus the economics of every firm that hires staff!

Equally, there are a host of completely no-see-um events that could occur. Dreaming up storyboards for disaster movies is fun but scary: the big West Coast Earthquake, a super-volcano triggering a mini-ice-age, a meteor-strike, a solar flare, an unwater landslide caused by ocean warming causing a tsunami to hit Europe’s Atlantic and North Sea Coasts, a storm surge in the North Sea flooding London and the Netherlands… there are any number of unimaginable events.

Or it may be something financial – a major bank discovering its bust on the back of a housing crisis, or a major hedge fund evaporating in a slew of downright stupid trades, or a pension fund exploding in a leverage/liquidity event. Don’t discount anything upsetting our cosy little applecart of expectations.  I think its 100% likely the remaining cryptocurrency exchanges collapse in welter of liquidity events – but if you were invested, no one to blame but yourself.

What about:

Bond Markets:   The consensus is bonds are likely to rally on the back of the pace of interest rate rises declining. That doesn’t factor residual inflation remaining higher than expected, the effects of the sheer over-indebtedness of nations like Italy and France, and even the USA, or the fact central banks are trying to sell down their QE inventory – creating a supply glut? The much heralded bond rally may yet be premature.

Earnings: Stock markets are still rolling on hopes, rather than the fundamentals of good vs bad companies and their earnings. The quality of earnings, and their sustainability to competitive threats and a changing economy matter. There is still a shake out on valuations and stock market multiples to come.

Currencies: Sterling has recovered all of its losses since the Lis Truss mini-budget disaster – but largely on the back of a) adults in the Downing Street room, and b) dollar weakness. What does the coming year hold for US growth on the back of a weaker dollar – with all the effects that would have around the global economy?

Big Themes for the year: Renewables, Carbon Mitigation, Agribusiness, Soil Enhancement, Commodity weakness, Healthcare in terms of AI, Obesity and Cancer drugs, Consumers and retail. These are all topics I hope to continue to explore in my daily rambles round finance in the morning porridge through 2023!

But, we still got a week to go of 2022… The Fed Hikes today, and the ECB and BOE are set to follow.. Whatever next for rates, inflation, growth, and assets… Anyone for the last choc ice?

Bill Blain

Strategist – Shard Capital