I suppose we all have our little conceits, the things we tell ourselves about who we are or what we do that make us feel better about ourselves. In my case, I tend to deny being a “stock tipster” or in any way in the predicting game. I prefer to refer to what I do as analysis, which has the advantage of sounding like more of an intellectual pursuit, but which also means that I can’t be wrong. Analysis is giving your opinion based on verifiable facts, whereas making predictions is basically making a guess based on a set of assumptions, and when those guesses turn out to be wrong there is never any shortage of people on social media to point it out.
That is why I am, as a rule, wary of making predictions. But at this time of year, they almost can’t be avoided. The calendar is changing, we are in a season that is about both reflecting on the past and looking forward to the future, and people like you who read newsletters expect people like me who write them to predict what will happen next year.
So here goes…
The prediction thing is actually even more problematic this year than it usually is because we are ending 2022 with so many unpredictable situations. Most urgently and potentially most worryingly, a large part of Eastern Europe is at war and there is no end to that catastrophe in sight. At this point, further Belarusian involvement looks likely and there is even a danger that expansion of the war zones adds to the risk to countries like Poland who are NATO members. We are, it seems, just one equipment malfunction, accidental bad aim, or deliberate provocation away from something that should, in theory, drag NATO and therefore the US into a conflict with a nuclear power. And if you aren’t scared by that possibility, you aren’t paying attention.
Even if we survive that, though, there is a chance that next year will bring Armageddon of the economic rather than the nuclear kind.
Chinese growth has slowed significantly but authorities there have abandoned the “zero-Covid” policy that is largely responsible. The problem, though, is that Chinese vaccines have proven to be much less effective than their western counterparts, that adds the risk of an economically damaging surge in the disease.
And that only adds to the worry about how developed economies will respond to the almost global shift towards higher interest rates and tighter monetary policy. Even as China has relaxed zero-Covid restrictions, the consensus opinion among economists is that the world is heading for recession. The question seems to be only how bad that will be and, if we add contraction in China into the mix, the answer is that it will be bad.
There is an awful lot that could go wrong next year, but that is always the case and yet most years turn out positive for investors one way or another. The difference this year is that some of the potential outcomes are really devastating, and even if they all turn out as well as can be expected, the base case for the global economy is still weak.
From a general stock market perspective that is largely priced in. So, while I expect a rough start to the year for the major stock indices by the spring, when the Fed will probably stop hiking, there will probably be a quite rapid recovery as traders look forward to the end of the year. That makes sense given that the S&P 500 is down more than 20% this year, not far off the average decline in a recession.
Oil, though, is a different story. There are some factors that add a bullish tone, like continued disruption of Russian supply and generalized inflationary pressure, but there are bearish ones too. Oil industry capex plans saw growth in 2022 as prices, and therefore profits were elevated, and increased supply will result from that. If global growth drops considerably for any of the reasons above, or any combination of them, none of that will matter. That will be the dominant factor and oil will fall dramatically. The overall risk to oil, therefore, is to the downside.
As I said last week, the dislocation of the usual correlation between oil prices and energy stocks in the second half of this year makes me a lot less worried by that when it comes to energy stocks than I might usually be, but I find it almost impossible to be bullish on oil overall for 2023.
That is why, even though as I said, I don’t like to make predictions, I will make one for next year. Crude will finish the year lower than it begins it. There, I said it!
Oh, and if that turns out to bed wrong, don’t bother to point it out to me on Twitter if that is still a thing in year, or on LinkedIn or wherever, I will already know and will have paid the price for getting it wrong. I won’t need you to tell me.
Here’s wishing everyone a merry Christmas, Happy Hanukah, or a cheerful whatever you celebrate, and a happy, healthy, and prosperous 2023!