Why did the stock market analyst quit his job? Because he was tired of trying to predict the unpredictable! But here at our newsletter, we're not afraid of a little uncertainty. In fact, we thrive on it. That's why we're excited to bring you our annual roundup of predictions for the stock market, cryptocurrency, and the economy. So, strap in and get ready for some wild guesses, because it's time to see what the future might hold.
The above opening paragraph was written with AI (artificial intelligence) ChatGPT. Created by OpenAI, ChatGPT is a chatbot -- a computer program that converses with human users that became publicly available in late November and had more than one million users rush to test the program within the first five days.
I asked ChatGPT to write an introductory paragraph for my annual Predictions newsletter on stocks, crypto, and the economy, but start with a joke, which leads me to my first prediction for 2023.
Prediction 1: ChatGPT (or some form of AI) will appear in the list of Top Google searches.
For comparison, some of the top searches in 2022 has been Wordle, Ukraine, Queen passing, and Election results. It’s ironic the service that could potentially replace Google would appear on its top list next year. Note that GOOG stock is down 15% since ChatGPT became available on the market.
Will the predictions come true in 2023? Find out by pressing the button:
2023 Stock Market
In a year when the S&P500 index (~3,800) is down 20.1% YTD and 27% from its high (4,817 on 1/4/22) to its low (3,490 on 10/13/22), there were three significant bear market rallies. In March, the S&P jumped 13% over a four-week period. The second rally was a two-month summer rally ending in August up 19% and the final rally peaked on December 13th up 19% over two months. What will 2023 bring? Will the S&P will lower or higher on 12/31/23 vs. 1/1/23?
FinTwit (financial “gurus” on Twitter) and experts on CNBC continue to have a bearish bias for 2023. Everyone seems to be on the same side of the scale calling for a low in March/April hoping that the Federal Reserve pivots from raising interest rates. For the past couple months, I was in the same camp. However, as more and more people invaded that campground, I am beginning to believe this will not be the way that 2023 market will behave.
Goldman Sachs forecast is a great example. Under the “soft landing” for the US economy scenario, the market goes down in early 2023 and finishes close to the same level by year end. GS is giving a recession a 35% chance versus an overall 65% chance by a myriad of economists.
Option 1: Soft Landing. Down in Q1, 2023 return of 0.0%. (Blue line in the chart)
Option 2a: Recession. Down to 3000-3200 in Q1/2, back to 3600-ish for a -5% return (black line in the chart). Option 2b is that the market does not make the comeback in the second half of the year and ends up down -15%+ for 2023.
Option 3. My Prediction. From 3800 down to 3500-3600 quickly, but then a freakish bear market rally back to 4400-4600 by June (~30% increase). But possibility of recession and poor Q3 earnings reports create a revival of the bear market where we end up back at 3200-3500 by year-end, down 8-15%. Potential picture of what prediction #2 could look like:
Prediction 2: The S&P500 finishes at 3,397 on 12/31/23 (down ~12%).
Economic Trends
There are a few key economic indicators watched closely and reported on to the general public. These indicators tend to shape public perception of the strength (or not) of the economy and how optimistic (or pessimistic) we are about the future. Let’s discuss Inflation Rate, Unemployment Rate, and Interest Rate (Fed funds rate) and make some predictions.
The Federal Reserve has a goal of keeping the Inflation rate at or about 2% long-term. From 2008 to 2020, there was no year over 3% inflation. In 2021, inflation leap up to 7.0% and November 2022 rate was 7.1%, significantly above targeted goals. The 12-month inflation rate peaked in June of 2022 at 9.1% and has been retracting since then.
One of the biggest arrows in the Fed Reserve quiver is to increase fed funds interest rates. This has a dampening effect on the economy which then helps in taming inflation. The Fed has made it clear that their number one opponent is inflation and will not stop until the job is done. They increased the interest rate seven times in 2022 by a total of 4.25%. It is anticipated that the Fed will slow down its raises to 0.25 points until it gets to its target which is not transparent to the public.
The labor market continues to be strong while GDP grew by a revised 3.2% in the third quarter after a 0.6% decline in the second quarter. See the charts below on inflation rate, fed funds rate hikes, and unemployment rates for the last 12 months.
My thoughts for 2023 economic data. As expected, the Fed raises three times at 0.25% and holds tight at 5% rate. Inflation rates continue to move downward during the first half of the year. Unemployment rate stubbornly holds at 4% or less. The market likes this scenario and FOMO sets in as no one wants to miss “buying the bottom”. This is environment that creates a ~30% rally to the mid-4000’s on the S&P index.
In early summer, we get an unexpected monthly increase in the inflation rate as the unemployment rate stays low and economic growth continues in Q1 and Q2. The Fed decides to raise rates a couple more times in the summer/fall timeframe taking the fed funds rate to 5.75% by year end. This “reverse-pivot” is what starts the bear market again. The summary of my 2023 economic rates is shown below.
BONUS. A recession is NOT officially announced during 2023.
Cryptocurrency and NFTs
It really felt like cryptocurrencies were going to bottom in early 2023 and the party could re-start in the 2H-2023. However, the hangover from SBF and the FTX scam has set back the industry by at least a year. Cryptocurrencies need some regulation to provide it credibility to garner institutional money. The one good thing that could happen with the FTX debacle is that the US provides common sense regulation, so exchanges don’t have to put their corporate offices in places like the Bahamas or other wild west locations.
In this section, I want to assess where the price of Bitcoin and Ethereum will end up by end of year. Since Bitcoin price still tied in close to the rest of the market as a risk asset, I expect its price will follow similarly to the chart I showed for the S&P index. Quick drop in January but a five-month rally. It is likely the moves on a percentage basis will be larger than the more stable S&P index. Bitcoin is currently at ~$16,500 and Ethereum is prices at ~$1,200.
For Bitcoin, it goes as low as $13,800 in January but then rallies to a high of $27,600 or 100% increase before finishing off the year back to $12,500. Ethereum will likely re-check its low at $879 before its bullish move to $2,015, for a 130% increase. However, the bear is brutal as it finishes the year under $800.
Prediction 4: 12/31/23 prices, Bitcoin: $12,486, down 24% and Ethereum: $794, down 34%.
The NFT market feels like a “pump and dump” as volume skyrocketed between August of 2021 and May of 2022. One benefit to the low volume is the reduction of the scammy cash grabs and rug pulls. The people who remain active are creating real projects by real businesses. These types of projects will be the winners in the future. When the crypto market does come back (likely in 2024), NFTs will enjoy more sunny days as well. It is the hope that the market participants will be able to lessen the scammer impact as compared to the 2021 bull market. I am a believer in the technology that NFTs and the blockchain can bring to the world. When the general public uses NFTs, but they are not called NFTs, that’s when it is embedded into everyday life and a real winner.
For a prediction for 2023, we can look to data on the monthly volume of NFT sales on Opensea marketplace. Dollar volume peaked in January 2022 at nearly $5.9 billion but has totaled only $2.2 billion in the past six months combined. Volume is seeing a slight uptick in December compared to November 2023, which was the lowest point since July 2021 at $251 million.
Prediction 5. Opensea volume picks up in 2023 compared to Q4-2022 but does not reach $1 billion in any one month during the year.
Black Swan Events
A black swan is an unpredictable or unforeseen event, typically one with extreme consequences. Since it is unpredictable but definition, one cannot predict what it will be. Well, that fact doesn’t scare me away. I put the question to a poll on Twitter and 76% of the respondents thinks we will have a Black Swan event during 2023. And if we do, economic slightly out polled political reasons. Black Swan Poll
Examples of recent black swan events, in my opinion, include Russia invading Ukraine and the COVID-19 lockdown. What are your thoughts here — do we experience another black swan event during 2023?
Prediction 6. I’ll go against the crowd and say we will have a year free from the ugly black swan.
Would you like to play along? Here is a scoresheet to track the key categories and your predictions. Please share via comments, email, or twitter.
Have a wonderful and safe New Year. Watch for the end of 2022, beginning of 2023 edition in the first week of January. Making some changes to the portfolios and tracking.
Efficiently yours,
DT
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Im with you, that way too many are negative expecting a 1st quarter low including GS. Perhaps low happens later from a higher SPX of 4500+ assuming no geopolitical event.
I do also expect that crypto is basically dead, similar to the dot com bubble bursting.
If inflation is really tamed I expect a huge bond rally.