Investing
By Kyle Prevost on December 22, 2023
Estimated reading time: 8 minutes
By Kyle Prevost on December 22, 2023
Estimated reading time: 8 minutes
Interest rates, stock market predictions, supply chain issues—what this column got right and wrong in 2023.
Kyle Prevost, creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course, shares financial headlines and offers context for Canadian investors.
It’s really hard to predict what the investment world will do. It’s even harder to predict what an investment is going to do within a relatively short time frame.
In fact, I’d argue that it’s so difficult, you probably shouldn’t use any single source of information to gain an edge and “beat” the market.
With that disclaimer out of the way, let’s look back at how we saw 2023 playing out, and give ourselves a report card. After all, we think it’s important to be accountable if you’re going to toss out public predictions.
As we look back on the year that was, some of the predictions may look obvious in hindsight, but you have to remember where the world was as 2022 came to an end. Inflation looked unstoppable, and all anyone wanted to talk about was doom, gloom and the 2023 recession.
For example, there was going to be increased volatility and short-term losses.
Double bottoms (where there would be a second collapse all the way down to where the market was in late 2022) were where the “smart money” was. The recession was “imminent.”
The U.S. stock market would be lucky to post small gains, and would be outpaced by European stocks.
The Big Short real-life main character, Michael Burry, bet on a stock market crash.
So, given that context, we’re pretty proud of how these predictions held up.
“People who are unemployed feel the unemployment rate: but everyone feels the inflation rate.
“Nothing gets people’s attention faster than paying higher prices for housing, gas and groceries. That’s what makes it such a tempting news story to keep reporting on. It also makes it almost impossible for politicians and policy makers to ignore.
“Until the inflation rate comes down, to at least 4% (it’s currently 6.8%), I don’t see most investment commentators talking about much else.”
Making sense of the markets this week: January 1, 2023
Grade: A
OK, admittedly, I started with a layup. Given how important inflation and interest rates are to the pricing of assets in almost every market, it was a high-probability bet that this would dominate markets in 2023. That said, it’s undeniable that the rapid pace of interest-rate rises took up most of the oxygen in the room this year. Over the last few months inflation has been coming down to the 3% to 4% level. And, as predicted, we’re finally seeing some other stories emerge. This week, for example, the Bank of Canada (BoC) announced a headline inflation rate of 3.1% and it failed to lead the news anywhere I looked (despite being slightly higher than predicted).
“None of the experts I read about a year ago predicted Russia would invade its neighbours and send geopolitical shockwaves reaching every corner of the planet.
“None of the experts I read about 10 months ago predicted the Ukrainian military response would be able to stand up to the Russian war machine for more than a few days.
“At some point maybe it would be best to admit that the experts really have no idea where this conflict is headed. Despite the tragic loss of life and catastrophic disruption of society, it seems to me that there is little evidence that either side will back down as we enter 2023.
“If—and this appears the more likely situation—the war drags on or escalates, it becomes difficult to quantify the damage inflicted on economies, like Germany’s, which are so dependent on Russia’s energy.
“Sure, demand destruction and the Green Revolution are coming… eventually… and at substantial cost. Even scarier is the unpredictable nature of the response to food shortages in desperate countries around the world. Generally speaking, food riots aren’t good for business (or humanity).”
Making sense of the markets this week: January 1, 2023
Grade: B
It’s not fun predicting that war will be awful. The tragedy taking place in Ukraine continues to be a struggle for all parties involved, and I don’t think we’re much closer to a long-term peace than we were at this time last year. The war has definitely contributed to high food costs around the world and continues to be quite disruptive within specific industries.
That said, much of Europe adapted to new energy supply chains more quickly than originally anticipated. A new market equilibrium appears to have been established, but there is no question that the war continues to be a worldwide drain on resources and, more importantly, an absolute tragedy.
“At this point, I feel like we might forecast a recession forever.
“Whether a recession will ever actually arrive or not is another story.
“With inflation in the U.S. falling to an annualized rate of 3.7% over the last three months, I’d argue we’re not only past peak inflation, but are actually well on our way to some sort of ‘new normal.’ With a substantial lag between when monetary policy is announced, and when its full effects are felt, we might not need a recession to lower inflation despite all of the headlines.
“Of course, I continue to refer to the fact that whether we see two quarters of -0.1%, and -0.1% GDP shrinkage, or a quarter of -0.3% growth followed by a quarter of 0.2% growth, the distinction of ‘recession or not’ is irrelevant. The first scenario is a technical recession by most definitions. The second scenario is just a bad quarter followed by a less bad quarter. Whether we have a recession or not really isn’t that important in the long term.
“Have the asset markets (such as stock or property markets) in which I’ve invested my money already anticipated the bad stuff coming by ‘pricing it in’?
“Almost assuredly.
“Remember that the stock market and the economy are not the same thing. Professional investors look past current events—they’re aware of the recency bias. They foresaw some rough waters ahead throughout 2022, but that doesn’t mean 2023 will also be so bleak.”
Making sense of the markets this week: January 1, 2023
Grade: A
Given the gross domestic product (GDP) situation Canada announced two weeks ago, we’re comfortable saying we knocked this one out of the park. Considering how many experts were predicting a recession at the end of 2022 and calling for falling markets, the theory that markets had priced in a pretty rough ride was the correct one.
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MoneySense is an award-winning magazine, helping Canadians navigate money matters since 1999. Our editorial team of trained journalists works closely with leading personal finance experts in Canada. To help you find the best financial products, we compare the offerings from over 12 major institutions, including banks, credit unions and card issuers. Learn more about our advertising and trusted partners.
There will be years when we look foolish making such tight time-constricted predictions about the markets. There are just too many variables to get this stuff right most of the time. That said, our guiding principle of staying positive about asset markets over the long term should keep us on the right path most of the time. I’d actually put this track record up against what most hedge funds and market experts would be predicting for 2023.
That said, I was dead-wrong on Bitcoin. Despite many high-profile bankruptcies and no real evidence of a use case emerging beyond facilitating crimes, the converts and the speculators appear to have set a pretty solid floor under that asset price.
Like most prognosticators out there, I failed to see the artificial intelligence (AI)-fuelled rush into Megacap tech stocks. So, I have to dock myself points there as well. Tune in for the next installment of “Making sense of the markets” for my 2024 predictions—no promises of a 2023 accuracy repeat.
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