As we start the new year, especially after a challenging 2022, the most frequent question we are asked is: What is your prediction for 2023?

Admittedly, our crystal ball is cloudy. It always has been and always will be when it comes to short-term predictions. Still, there is no shortage of “experts” – supported by research, sophisticated models, and persuasive reasoning – that routinely broadcast what’s in store for the next twelve months. The harsh reality: it’s fool’s gold – entertaining but rarely actionable.

Let’s look back at predictions from a year ago of where well-known banks thought the US stock market (S&P 500) would finish 2022^[1]:

Ouch! The average prediction missed reality by over 1,000 points to the downside.

Let’s try a different group and predictive metric: the Federal Reserve and their “dot plot,” where they project the federal funds rate over the near term. At the end of 2021, the Fed anticipated the rate would be around 1% by the end of 2022, and market expectations agreed.

By March 31, 2022, however, the Fed’s estimate doubled to about 2% by year-end 2022. But the changing predictions didn’t stop there.

On May 4, 2022, Federal Reserve Chair Jerome Powell said, “A 75 basis point increase is not something that the committee is actively considering.”^[2] Well, that didn’t last long as the Fed’s next four rate hikes (June, July, September, and November) all resulted in increases of 0.75%!^[3]

The reality is a lot changed over the first several months of 2022. Unfortunately, most news was negative, highlighted by Russia’s invasion of Ukraine, soaring inflation, and fears of a looming recession. As such, the prognostications referenced above looked foolish and obsolete rather quickly. In any short-term period, the combinations of variables and outcomes are seemingly infinite and impossible to pinpoint.   

As Hall of Fame baseball player and manager Yogi Berra once said: “It’s tough to make predictions, especially about the future.”

So, if short-term predictions rarely come to fruition – and when they do, it’s more luck than sustainable skill – why do so many people try? Human nature. Our brains are prediction machines, and it’s hard-wired into our DNA.

As with many human behaviors, it stems back to fight-or-flight. Uncertainty is frightening, which causes humans to seek the illusion of “certainty.” By anticipating the future, the brain can prepare the body for what’s to come. Chemical responses trigger fight-or-flight actions allowing us to devise plans to evade danger or take advantage of opportunities.

Given that, the deception of “certainty” is the root cause that fuels the human appetite for predictions…and from there, it’s a constant loop of analyzing and reassessing. While we can’t rewire our brains, we can acknowledge this shortcoming and choose to look at short-term predictions in a new light. 

With that in mind, we don’t pretend to know how 2023 will unfold. As long-term strategic investors (not tactical market allocators), we don’t attempt to make short-term predictions about interest rates, the economy, or markets.

However, we are hopeful that better days are ahead. Inflation is falling, the Fed is nearing the end of its rate hiking program, meaningful yield has returned to the bond market, and economic weakness is priced into markets. That’s not to say it’s clear sailing ahead and that things couldn’t get worse before they improve, but I’m a big believer in the quote: It’s never as good as it looks and never as bad as it seems.  

^[1] https://www.reuters.com/world/us/feds-powell-75-basis-point-rate-hike-not-being-actively-considered-2022-05-04/

^[2] https://www.forbes.com/advisor/investing/fed-funds-rate-history/

^[3] https://www.reuters.com/article/usa-stocks-research-factbox/factbox-wall-street-analysts-2022-outlook-for-sp-500-idUSKBN2JF0ZX

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