Out of fear of being horribly wrong, I have avoided looking at my “guestimates” or – more professionally I suppose – forecasts for year-end 2023 levels of select equity indices, UST yields and other assets. However, seeing that most Street analysts are scrambling to revise their likely-to-be wrong year-end forecasts at the moment has inspired me to come clean and lay it all out there. The difference between me and the Street pros is that most of the Street analysts / economists get paid a boatload for their forecasts, no matter how wrong they might be. It’s not fair - I’m just as wrong, so shouldn’t someone be paying me?
Look – the reality is that the year is not over, although we are now seven months into it. Street forecasts from earlier this year look rather “off:, so much so that most analysts / strategists are revising their forecasts for year-end 2023. For example, the table below extracted from a recent #Bloomberg article (here written by @johnauthers) will give you a sense of sell-side revisions to year-end S&P 500 forecasts. Note that since that article was penned on July 21, at least two of these firms have revised their year-end forecasts for the S&P 500, including #Oppenheimer (from 4,400 to a year-end level of 4,900), and #Citibank (from 4,000 to a year-end level of 4,600.
Including the recent Oppenheimer and Citibank revisions, of the 23 analysts above:
16 have revised their year-end levels higher,
Six are sticking by their forecasts from the beginning of the year (range is 3,400 from #BNPP to 4,500 from #DeutscheBank), and
One (#CantorFitzgerald) has revised their year-end forecast sharply lower.
Before I drift into how I have done as far as my forecasts, let’s take a quick look at the economic assumptions that were underlying my thought process a few months back as I was developing by end-of-year 2023 forecast levels. I believe that my economic forecasts for 2023 have not been terribly wrong, but wrong enough, especially since US growth remains resilient and global economic growth also remains better than expected just a few months ago. A 2H23 “shallow recession”, which I had thought might occur, looks increasingly unlikely. Here are the economic themes that I thought would “shape” the year back in January:
A shallow U.S. recession would occur in 2H2023 ––> this is looking less and less likely;
The U.K. economy will be the worst performing of the G7 economies (“it will contract”), and the BoE will have to raise rates aggressively to address stubborn inflation ––> largely true so far. I had thought that the Pound would pay for lethargic growth, but the opposite has happened – the FX market has been much more focused on the BoE lifting rates/tightening monetary policy more than its peers than the poor state of the UK economy;
The ECB will be the first to capitulate and stop raising rates ––> not yet, but let’s see; ECB seems steadfast at the moment in its quest to address high core inflation
Bank of Japan would likely begin some tightening steps which should cause the Yen to strengthen ––> first part right, second part wrong (so far)
China will dig itself out of its malaise and investors will come back ––> doesn’t feel that way now
Ukraine-Russia war drags on ––> sadly, yes
The left side of the table below illustrates actual levels at July 31, 2023 vs those at year-end 2022. My January forecasts are in the right-most columns with the variances painfully highlighted.
As far as equities, I have had the direction correct in the US, Europe, Japan and China, but wrong so far in the U.K. and emerging markets (the latter of which has rallied thanks to the weakening USD and upward revisions to global GDP). Having said that, I have so far significantly missed on the magnitude of the run-up in US and Japanese equities even though the direction has been right.
I have been better in predicting the intermediate and long end of the UST curve, but have badly missed the change in yields on the 2y UST. The short end of the curve remains closely correlated with the Fed’s increases in the Fed Funds rate. I had thought the 2y-10y inversion would narrow when in reality is has become more inverted, mainly because of the sharp increase in the yield on the 2y UST.
As far as corporate bond spreads, my expectation of a U.S. recession in 2H2023 influenced my forecast of wider credit spreads, when in fact the market has done exactly the opposite, even considering the fact that there was an unexpected mini-bank crisis in March. Bond investors are rushing into credit assets, not out of them. In this respect, I have been wrong so far, although plenty of pundits say credit is deteriorating. It doesn’t look that way to me, at least if the public bond markets are an accurate proxy.
Gold and oil are both higher than I thought they would be, although I got the direction right on gold.
As far as currencies, I have the USD about right as far as the level vis-a-vis the DXY (currency basket), but have missed directionally and badly on the Yen, Pound and Euro. The former has remained much weaker than I expected, while Sterling and the Euro have strengthened more than I expected. I remain slightly surprised in this respect, but it is apparent that interest rate differentials are by far the biggest driver of FX rates, not the relative outlook of each economy. So much for my FX expertise!
I am sticking to my guns, probably outdated and not a very smart approach, but this current “life is very good” euphoria in financial markets simply feels too good to be true. Time will tell. And while you are digesting this diatribe of forecast information, please let me know if any buy- or sell-side firms need an analyst or economist – I can be just as wrong as the high-priced talent at most of the Street firms!
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