The first thing to realise about yearly looks ahead is that they can prove to be spectacularly wrong. So, when looking ahead always be aware that these outlooks can change as the incoming data changes too. Projecting the future beyond 6 months tends to be virtually impossible anyway as life is a constant engagement with change. So, be prepared to adapt as market conditions change. However, with that being said, here are some key themes that look to be ahead for 2023.

US recession ahead, but stocks bounce first

Economists in a recent Bloomberg poll put the chances of a 2023 downturn for the US as a 65% chance. By contrast, a Bloomberg Economics model is reporting a 100% chance of a US economic downturn. A combination of rising interest rates and high inflation has been crimping not just the US economy, but Europe too. The Bank of America sees a recession as all but inevitable for the US, Euro area, and the UK. The base case now is for a US recession, but that is expected to be mirrored around much of the globe.

Global recession

According to BNY Mellon Investment Research, there is a 60% chance of a global recession. The end of fiscal stimulus, higher interest rates, high energy costs, and the cost of living crisis are all expected to put a wider strain on the global economy. Barclays sees global growth at just 1.7% for 2023 which it cites as the weakest expectation for the global economy in the last 40 years. For a full rundown on what Wall Street is expecting across a range of assets for 2023 check out this Bloomberg piece here.

A late bounce back in stocks for 2023?

Despite the dominant US recessionary outlook for 2023, a Bloomberg News survey of 134 fund managers reports that investors are still expecting a 10% rebound in global equities for 2023. That would most likely be anticipated to kick in around the second half of 2023. Remember that stocks tend to lead a recovery even when GDP, payrolls, and earnings fall. Check out this selection of charts below which show that stocks bounce first out of a recession from a recent historical perspective. Investors are banking on that phenomenon repeating itself again this year.

So bear this in mind. Typically when the data is getting bleaker and bleaker stocks are pricing in the recovery. That is the time when some longer-term investors will consider buying these dips in the hopes of catching bargain prices. Any falls to 3200 – 3000 in the S&P500 have to be considered as value. This is around the 36% fall area from the latest peak and is also the average recessionary fall figure in stocks. So, on average, this is where a recessionary pullback could reasonably be expected to bounce based on previous recessions. However, as always, there are no guarantees, only probabilities.

Gold’s time

Gold is touted as an inflationary hedge and BCA Research sees gold as an attractive hedge against a variety of geo-political risks as well as a second wave of inflation. JPMorgan sees gold pushing up to $1860 in Q4 of 2023. So, if inflation remains high, growth slows, and the Fed signals a clear end to its hiking cycle one commodity to watch for potential strong gains is gold. This could be a great play, but like always, timing is key.

Oil demand

The general view is that, despite slowing global demand, oil markets should be supported this year with a $100 target cited by many analysts. The bottom line is that supply constraints are seen to outweigh demand concerns. Deutsche Bank sees a $100 target, Morgan Stanley sees Brent Crude at $100, and the general view is that the underlying trend in the oil market is supportive. So, dips could be seen by some as a buying opportunity.

JPY strength

The Bank of Japan has slowly been loosening its grip on its ultra loose monetary policy as it expanded its bond yield cap on JGBs last year. Expect this crack to eventually result in a rate hike move. So, JPY strength against the USD could be a key theme of this year – particularly if/when the Fed signals a clear pause in hiking rates. Around February could be a possibility, but timing will be helped by the incoming data, so watch the data to see how it changes the picture.

Key risks

One of the key risks is geo-political. Will the Russia and Ukraine crisis accelerate? Will a tactical nuclear missile be used? Will China make a tactical move on Taiwan? Will a huge cyberwar develop between competing nations? While no present risk is expected to dominate this year, these are the key ones to look for. Another risk is the climate. Weather patterns have been more extreme recently and global warming could result in some more economic disruption as weather patterns react to hotter temperatures.

So there we have it, a look at some key themes for 2023. In all probability, there will be another as yet unknown driver that will prove to be influential. The key is to spot that theme as it develops and to always keep an open mind.