2022 was full of surprises – will 2023 match it?

What a year! It is customary for market commentators and fortune-tellers such as myself offer a summary of last year’s performance. And to offer ‘insights’ (aka guesses) into what to expect next year. But I like to be different! That way, we are kept on our toes as the greatest quality anyone in the financial markets can have is this: keeping an open mind to current trends – and especially their reversals.

Why so? Simply because as in life, facts change as time moves on. Wars start, prominent individuals suddenly die, a new discovery is made, we all get older and with age, our attitudes and perceptions of ‘reality’ change.

When young, we have little fear of the new and are gripped by the new possibilities and often plunge headlong into the new. I know I did. That is how societies progress. The youthful lead the way, often rejecting the ‘established’. But many dead-ends are followed and only a precious few survive reality to forge a new environment.

As we get older, we become more conservative – we wish to conserve what we know and have – and are more leery of radical new ideas that could change our world. How many of the over-70s sign up to the highly fashionable ‘woke’ movement compared with those under 30, for instance? You only have to read the comments section in the Telegraph (dominated by male retirees with all the time in the world to be armchair experts) to see this at work in real time.

The problem with reviewing the past year is that it is usual to focus on the big calls. But as traders, we often make a series of short term – often profitable – trades lasting only a few days. My recent trades in Gold/Silver for VIP Traders Club members is such a case – in Gold, we made a small two-day $30 profit and in Silver an 90 cent gain – but that won’t feature in anyone’s list of Big Wins.

But make enough of those and you won’t have to worry about the Big Calls!

One major problem with Big Calls is that they almost always suffer deep corrections along the way. The usual fate is that your stops are touched along the way and you are out prematurely before the full potential of the campaign can be realised.

I have found that this is one of the critical defining points in a trader’s life.

Do you immediately check your charts to confirm your original view and then re-enter with another stop? Or do you nurse your loss resentfully and abandon the darned campaign (only to see the market surge your way without you, adding maximum insult to injury)?

For some, that experience would be a devastating blow to confidence. For others, it would be merely the necessary price to pay using sensible stop protection in an ongoing major campaign which steels your resolve to stay the course.

Yes, trading the markets is where you find out what kind of person you really are in the most vivid way. Those perceptive enough will look upon such an experience as a lesson in self-understanding – and vow to make some changes so that they will act differently the next time.

That way, real traders are forged from experience. In this way traders are trained; not born. And most of us have to do the training ourselves.

So in this holiday period where we are encouraged to reflect, I encourage you to determine where positive changes to your trading technique can be made. Go over some of last year’s losses and your reaction to them. Also do the same for some of your wins. You might discover something very useful to enable big wins next year.

Is your glass half full or half empty for 2023?

The stock markets are heavily divided between those that believe the Fed will have to ease up on its rate hikes as the economy slows (and thus support stocks) – half full – and those that take the Fed at its own words and expect rate hikes to continue (and depress stocks) – half empty.

And since the mid-October index lows, the bulls’ optimism has been winning out with the Dow retracing a massive Fib 76% of the wave off the January ATH.

And in the past few weeks, economic data has been coming in generally weak with the Global PMI (Purchasing Managers Index) well under the 50 level to indicate a rapidly slowing economy.

This is a clear illustration that the economy is definitely not the stock market! But if it is more a crystal ball peering into the future, then the outlook is dark indeed.

But it is clear that the majority of investors today are hoping that the current weakness is temporary and once inflation is licked (it is declining) early next year, blue skies await investors and interest rates will decline as the Fed will be forced to pivot some more.

This rapid recovery (at least in the Dow but unmatched in the tech-heavy Nasdaq) has inevitably spawned an outpouring of positive forecasts for next year. Remember, sentiment drives markets. And investors are feeling very positive (aka complacent – see last week’s blog)

I see one perennial favourite theme being trotted out that the UK stock market is too cheap to ignore and is rearing its head again. One prominent journalist has laid out the many reasons why the UK market is so ‘cheap’ compared with the US market. The UK does not have any of the huge growth tech companies with the FTSE dominated by boring old insurers, banks, miners and so on. But she still advises buying!

But the UK does have one clear advantage – dividend yields in the larger UK companies outstrip those techies in the US. But on the negative side, these dividends are paid out in sterling – a far less attractive currency than the US dollar.

Of course, all of this ignores the idea that all of these valuations revolve around earnings forecasts – and actuality.

If the global economy is buckling under the heavy weight of the current record debt levels with a rapidly rising cost of debt servicing into an inflationary scenario, then odds are not high that current stock earnings can be maintained – and may well decline hard. Recent weak earnings and guidance from the vital computer chip industry bears this out.

The current wave of strikes also does not bode well for company profitability as labour costs escalate. It seems the era of cheap labour is over and the long-heralded Robot Revolution may still be years away.

Not only that, but taxes are headed higher with disposable incomes under severe pressure. That will be noticed come April when payslips are examined.

Thus the backdrop for next year is supremely negative. Yet stocks are flying high. A Day of Reckinung awaits and it will not be pretty.

And will the Fed actually start to ease up on rate hikes? Those of us long-in-the-tooth will well recall the mess Paul Volcker landed himself (and the stock market) in when as head of the Fed he had to wrestle with surging inflation in the 1970s and into the 1980s.

Basically, he raised rates to ‘fight inflation’ but then when the economy suffered with higher unemployment, he prematurely pivoted , sharply reduced rates, and saw inflation take off like a rocket.

He then slammed on the brakes again, raised rates again and crashed the stock market.

I am quite sure Mr Powell has studied this history lesson and has vowed not to repeat the ‘Volcker Mistake’. He will thus tend to keep rates higher for longer – and crash the stock market himself!

So in a sense, so long as inflation remains well above the 2% ‘target’ he will keep the pedal to the metal.

And what if inflation remains stubbornly high well into next year anyway? This will rest on the pivotal market for inflation – crude oil. Because the producers such as OPEC+ determine the overall price ranges simply by cutting production voluntarily, what happens next year is largely in their hands.

And currently, they are restricting supply with the Western governments doing all they can to put a $60 cap on Russian Urals crude. This may or may not work but at least OPEC+ has the power to advance prices with real cuts if necessary.

Also, the US Strategic Oil Reserves are about empty (that has recently depressed prices) and need filling up now. Do you think OPEC+ will let this opportunity slip to let Biden off the hook and supply cheap oil to him? Here is the Brent chart which is the standard traded internationally.

Thus if prices advance into next year as I strongly suspect, more pressure on inflation.

One other factor – the Fed is selling off its Everest of bonds – and reducing money supply – and that will put even greater pressure on the Treasury market. Prices will decline further – and will signal to the Bond Vigilates – who are quick to pick up market clues – that inflation has not died but will in fact surge even higher.

Thus, we are entering a Perfect Storm of rising inflation, higher taxes, rising wages/salaries and reducing company earnings, lower demand, reducing money supply and higher for longer interest rates on huge debt piles.

Can the supremely confident/complacent Dow weather that storm? The small cap share indexes and the tech Nasdaq are leading the way down. It is just a question of time before the Dow joins them.

Are the Ags poised to surge higher again?

VIP Traders Club members were big winners in the great Wheat/Corn/Soybean bull markets of 2020 – 2022. We took major profits in this period. In recent weeks, they have been under pressure but I see another big opportunity to take part in a campaign I have been planning.. Here is Wheat

It is trading near the major lows and well off the March high. If you like this setup why not take a Membership and join us in a two week Free Trial? We are also trading the stock indexes, currencies and others major markets.

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