2023 Market Predictions

For this very reason, all I am able to do is to absorb the market data available, and come up with outcomes that are more likely to occur. In my opinion, the biggest dynamic we will witness in 2023 is a reduction of value in assets like housing.

The housing market has been more like frozen than anything else during the last few months. 30yr fixed mortgage rates have ballooned to about 6.5%. While loan origination has dropped close to 40% compared to 12 months ago, refinancing has cratered by 85%.

Yes, prices have somewhat softened in some areas, however the main event has been a lack of transactions. Right now we are witnessing a standstill between sellers and buyers. Sellers are not very incentivized to reduce their asking price as they are largely still employed, and can continue to service their debt payments. Available inventory remains low, thus keeping prices fairly stable. Unless and until the labor market shows signs of distress, housing prices will not take a dive.

The most important development in financial markets in 2022 has been the FED raising rates.

The Federal Reserve raised the fed funds rate by 50bps to 4.25%-4.5% during its last monetary policy meeting of 2022, pushing borrowing costs to the highest level since 2007, and in line with market expectations. It was a seventh consecutive rate hike, following four straight three-quarter point increases. Policymakers reinforced that ongoing hikes in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2%. The Fed now expects interest rates to reach 5.1% next year, 4.1% in 2024, and 3.1% in 2025, a higher level than previously indicated. Meanwhile, GDP growth projections were revised higher for this year (0.5% vs 0.2%) but lowered for 2023 (0.5% vs 1.2%) and 2024 (1.6% vs 1.7%). Inflation forecasts were revised higher for 2022 (5.6% vs 5.4%), 2023 (3.1% vs 2.8%) and 2024 (2.5% vs 2.3%). source: Federal Reserve

While nothing is certain, yield curve inversion has correctly predicted all recent recessions. To be more exact, the 3-month 10 year inversion has correctly predicted the last 8 recessions without ever failing.

At the time of writing, the 3-month yield sits at 4.374%, while the 10yr Treasury yields 3.879% for an inversion of roughly 50 basis points. As you can see from the graph below (source: Federal Reserve), the reading is extreme. It has only been as bad right before the Dotcom recession, and the Great Financial Crisis.

Again, nothing is certain, however statistically what we are seeing is very significant, and we should prepare accordingly while managing our finances.

I put the odds of a recession close to 100%, however I do first see the real potential for a misaligned behavior in financial markets. To be specific:

1. I expect the S&P to stage a significant rally in 2023, and reach a minimum objective of 4,300 with a clear possibility at marginally higher all time highs. This is before turning down, and never reach those levels again for many years.

2. I expect housing prices to be resilient at the beginning of the year, only to head significantly lower in H2 2023, up to 30% less in some areas of the country

3. I expect precious metals to have a very significant rally in 2023, that should take hold fairly soon at the beginning of the new year.

4. I expect Bitcoin to continue to adhere to price movements consistent with its 4-year cycle, and find a bottom in the first quarter of 2023, with accumulation resuming for the remainder of the year, and a very strong 2024 performance.

Only time will tell if I am right, however I will follow this roadmap until proven wrong.

Happy 2023!