Kyle Prevost, creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course, shares notable financial headlines and provides context for Canadian investors.
It’s a tough job, but…
Predicting what the investment world will do is difficult. Forecasting the short-term movements of specific investments is even harder. Because of that, you shouldn’t rely on a single source of information to try to “beat” the market.
With that caveat, let’s review how our expectations for 2023 unfolded and grade our forecasting. Accountability matters when you make public predictions.
Remember the backdrop at the end of 2022: inflation seemed unstoppable and many commentators focused on doom and the prospect of a 2023 recession. Expectations included higher volatility, short-term losses, and bearish scenarios like double bottoms that would take markets back to late-2022 levels. Many experts called a recession “imminent,” and forecasts suggested U.S. stocks would barely gain while European stocks might outperform.
Given that environment, some of our predictions were conservative, and others were bolder. Here’s how they measured up.
Inflation will continue to dominate the news
“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
This was a high-probability call. Inflation and interest rates influence asset pricing across markets, so it was likely they would dominate headlines in 2023. Indeed, the rapid pace of rate hikes was the prevailing story. Over the year inflation eased toward the 3%–4% range, and only more recently have other topics begun to take more of the spotlight. For example, the Bank of Canada reported a headline inflation rate of 3.1%, which received less attention than earlier, higher readings.
The Russian invasion remains predictably unpredictable
“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.
“Demand destruction and a transition to other energy sources are coming, but they will be costly. Food shortages remain a serious global risk; unrest in food-importing nations can be destabilizing and damaging to economic activity.”
Making sense of the markets this week: January 1, 2023
Grade: B+
Predicting the human and economic costs of war is grim work. The conflict in Ukraine has continued to exact a heavy toll and remains unresolved. It has contributed to higher global food prices and disrupted specific industries. At the same time, much of Europe adapted to new energy supply chains faster than many expected, and a new market equilibrium has emerged. The conflict remains a drain on resources, but some of the most dire economic scenarios did not fully materialize.
The much-talked-about recession will continue to be talked about
“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 falling and monetary policy effects lagging, we might not need a classic recession to bring inflation down despite the headlines.
“The technical distinction between a couple quarters of slight GDP decline and a single bad quarter followed by modest growth is less important than whether markets had already priced in the bad news.
“Remember the stock market and the economy are not the same thing. Professional investors look past current events; they anticipate future conditions and factor those into prices.”
Making sense of the markets this week: January 1, 2023
Grade: A+
We judged that markets had largely priced in the downside. With Canada’s recent GDP data showing resilience, that assessment proved accurate. Many experts forecast a recession at the end of 2022, yet markets performed better than the most bearish scenarios suggested. In short, markets were forward-looking and had already accounted for much of the expected weakness.
Six quick-hitting predictions
- “Forward-looking stock markets see past any ‘hard’ or ‘soft’ landings and surprise on the back of earnings-per-share strength.”
Grade: B
Earnings per share declined from the record highs of 2021–2022, but the drop was milder than many forecasts anticipated. - “Capital moves away from unproductive assets like speculative cryptocurrencies and unprofitable tech stocks toward more productive parts of the economy.”
Grade: F
While money did exit many speculative cryptocurrencies, it flowed into Bitcoin and some major tech stocks instead of broadly shifting to more productive sectors. - “Supply chains will adjust to a new normal, with or without China, and disinflationary pressures continue.”
Grade: A
Supply-chain improvements were a major factor in the decline in inflation during 2023, supporting the view that some inflation drivers were easing. - “Labour markets remain relatively strong despite weakness in certain sectors, enabling developed economies to weather short-term shocks and encouraging entrepreneurship.”
Grade: A
Despite a rapid rise in interest rates, Canada and the U.S. maintained unemployment rates below long-term averages. The labour market has loosened somewhat, but it stayed stronger than many expected. - “A combination of rate pressures and political effort to reduce red tape will gradually improve balance in the Canadian housing market, making homeownership more attainable without massive job losses.”
Grade: B
Canadian home prices cooled, but the market is not fully balanced. Housing starts fell over the year, so immediate relief for buyers remains limited. Political focus on housing has increased, which could lead to longer-term changes. - “If you bet on positive market outcomes, you’ll often be rewarded. I predict the S&P/TSX Composite Index will be up to 21,600 within a year.”
Grade: A
At the time of writing, the S&P/TSX was near 21,000. While the precise target wasn’t hit yet, the prediction was relatively close compared with many market forecasts; further momentum could still reach that level.
Overall 2023 Report Card Grade: Solid B+
There will always be years when tight, time-bound market predictions miss the mark—too many variables are at play. Still, maintaining a constructive long-term view on assets has generally served investors well, and our record for 2023 compares favorably with many forecasts from hedge funds and market pundits.
Where we were wrong: I underestimated Bitcoin’s resilience. Despite high-profile bankruptcies and limited mainstream utility beyond speculative trading, Bitcoin and some large tech names found strong support from investors. I also underestimated the AI-driven rally into megacap technology stocks.
We’ll publish another outlook for 2024 in the next installment of “Making sense of the markets.” No guarantees of repeating 2023’s accuracy, but there will be fresh observations and lessons learned.