The fact that this article is posted more than halfway into 2023 is going to make it the “look ahead” seem more historic rather than a prognostication. However, I will do my best to recall my thoughts at the end of 2022 about my predictions for 2023.
A Look Back Before Looking Forward
2022 turned out to be a rather active year in a number of ways. At the end of 2021 inflation was going up. The administration was saying that this was temporary due to supply shortages and that this will go down quickly once the supply chain catches up.
Inflation Continues The Upward Spiral
Unfortunately, that didn’t convince enough people and so inflation continued to rise. I am of the theory that inflation goes up when people feel that prices are going to continue to rise, and inflation goes down when people think that prices will fall. Thus, inflation becomes a self-fulfilling prophesy.
The Fed decided to act and act quickly in 2022 to try to cap this inflation. However, the expectations that prices would stop going upward when Fed rates were increased didn’t seem to make a difference. This cause the market to start looking at the Fed’s moves to see if they would continue to rise or stop raising rates. Any time “bad” news came out about an economic indicator the market would rise and when the Fed telegraphed that it was going to continue raising rates, the market would fall.
The Crypto Market Crashes
While not a major impact, the supposed safety and always-will-go-up nature of cryptocurrency was tested in 2022. Bitcoin, which had hit a high of nearly $64,400 per coin in late 2021, lost nearly 75% of its value by November of 2022. It turns out that when a currency has nothing behind it (not even a government entity), it is only worth what people believe it to be worth.
Housing Market Slows – Sort Of
As the Fed increased borrowing rates, the housing market saw the effect earlier than some other industries. The increased Fed rate caused the interest rate on loans to go up as well and that slowed some of the buyers who were looking at higher monthly payments.
However, this slowdown was geographically dependent. With the number of housing units on the market still lower than multi-year averages, the lack of a supply of homes kept prices up in various parts of the country. A local real estate agent indicated to me that in the state of Delaware area, she saw no drop in demand for housing last year.
An Inflation Reduction Act That Did Nothing Of The Sort
Congress passed the Inflation Reduction Act in 2022, but it didn’t really address inflation very broadly. It did encourage employment in a few sectors, and it challenged the government to reduce the federal deficit. There was a push to reduce drug prices, but the first year (2023) it would only identify 10 drugs to reduce.
What Is Ahead for 2023
Okay, so this is the part that I have to erase my short-term memory since this is being written in August of 2023. However, here are the broad trends that I predicted would happen in the upcoming year.
The fed was indicating that it wanted to have a Soft Landing to the economy. This goal was to raise interest rates only high enough to make the economy slow down slowly so that manufacturing would slowly reduce and jobs would slowly reduce. In this scenario, workers who got laid off would be able to find new jobs without too much trouble. And the reduction in manufacturing would slow things but not drastically.
To me, this looked like a good plan as long as they didn’t overdo the interest rate changes too quickly or for too long. So I am predicting that the market will slow down compared with last year and be a rather flat year. This means that it will more be a market of stocks rather than a stock market. Great for short-term investors. Long-term investors won’t care because they are still sitting on great gains from the past 5-year period.
Now if you asked me which sectors would do better, I couldn’t make any prognostications that specific. Besides, I already know how that worked out and I didn’t have any particular ideas other than thinking that the defensive sectors would do better than the growth sectors. I did think that 2023 will be a good year to revisit portfolios and make adjustments to set the course for the next 5 to 10 years.