Some Financial Thoughts for 2023

2023 Predictions
Treasure Investment Team
January 4, 2023

The time has come again to make some forecasts and predictions for the new year. But first, we take a look back at last year’s predictions and see how well we did.

2022 Rewind

Spoiler alert 2022 was a very poor vintage (albeit after a great 2021). Here is a review of the predictions made for 2022 (please don’t laugh):

1) Growth will moderate with real GDP being below 3% for the full year - YES

2) CPI will not be above 4.0% next year - NO

3) 30 yr bond yield will stay below the 2021 high (2.50%) - NO

4) High Yield Credit will experience positive returns- NO

5) Gold will touch $1,600 - NO, but close

6) Oil will touch $55 - NO

7) The USD will remain strong and EURSUD will touch 1.07 - YES

8) The S&P 500 will experience a 7.5% correction but finish the year higher - YES/NO

Overall this led to a poor 2.5 out of 8. Lots of lessons to be learned…

What these predictions completely missed was the persistent inflationary wave that triggered a strong monetary response from the Fed via one of the sharpest hiking cycles on record.

2023 Fast Forward

Our 2023 predictions stem from one key trend we’re already seeing - that the bulk of the inflationary wave is behind us. We can infer this from the turn in the CPI data coupled with a continued economic slowdown and  the Fed seemingly beyond its “peak hawkishness.”

With this in mind, let’s take a look at our predictions.

1) 2023 Real GDP will be below 1%:

It is very likely that a mild recession will hit in 2023. The reasons for its mildness are twofold. First, it is probably the most forecasted recession ever, thus it shouldn't take anybody by surprise. This leads to less downside risk as most people will be prepared for it. Second, since the previous recession was so recent there hasn't been a lot of time for a large build up of misallocation of capital and leverage.

2) CPI will finish the year below 3%:

This would echo the weakness in the economy and the goods price pressure we already saw at the end of 2022.

Source: Bloomberg, Fed

3) The Fed will not hike rates above 5.25%:

Given the potential weakness in the economy and decelerating inflation the Fed doesn't need to be as hawkish as in 2022.

4) 10 year Treasury yield will not move above 4.5%:

4.5% is right above last year’s high. We should expect better performance from the government bond market compared to the very poor performance last year. This is especially likely given the deceleration in the economy and inflation combined with a less hawkish Fed.

5) The S&P 500 will retest its low but manage to finish the year higher:

Equities will have to digest lower earnings which will create some downside pressure. On the other side, with less upside risk for bond yields to move higher the door should be open for some P/E multiple expansion, helping equities finish the year marginally higher.

6) High Yield credit will generate above 8% return:

High Yield will shine next year given its elevated starting yield. We should also expect the default environment to remain relatively tame given our mild recession expectation. Furthermore, when the 2 year Treasury yield falls below the Fed Fund rate (as it did recently), High Yield bonds have historically generated a 10% return the following year.

Source: Bloomberg

7) The USD has peaked:

While typically a strong USD is expected during economic slowdown, the Fed is being less hawkish (as can be seen by the December deceleration in the FOMC rate hike pace from 75 bps to 50 bps). This should create some tailwinds for any meaningful USD appreciation.

8) Oil will finish the year below $80:

Despite China reopening in 2023 we should generally expect a decline in GDP growth. This lower demand will act as a headwind for any strength in the oil market. While at the same time, US oil production is back to an all time high.

In spite of the indicators we see contributing to a more challenging economic environment, we also see opportunities for businesses that deploy their cash wisely to thrive.

Let's see how this new year pans out and how well we do on our predictions. Wishing you, your families and loved ones a wonderful 2023!

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