10 Predictions For 2023 (EP.290)

Episode Summary

Executive Summary: The episode is a wide-ranging year-end review centered on 2022’s historic pain in stocks and bonds, the psychology of investing through drawdowns, and what might matter in 2023. Michael and Ben discuss inflation, Fed tightening, sector winners/losers, retail behavior in meme stocks, housing, recession odds, and how investors should respond to higher yields, weaker growth, and volatile markets.

Main Topics: 2022 market losses and historical context (Priority: 5/5): They frame 2022 as one of the worst years ever for diversified portfolios, with both equities and bonds posting rare simultaneous declines. The discussion emphasizes how unusual it was relative to prior bear markets and bond selloffs. Saving, accumulation, and investor psychology (Priority: 5/5): A major theme is that ongoing contributions and higher savings rates can offset portfolio declines over time. They stress that investors should focus less on daily market noise and more on long-term accumulation. 2022 predictions vs. reality (Priority: 4/5): Ben reviews his prior-year forecasts, noting several correct calls but also some wildly wrong ones, using the exercise to illustrate the difficulty of forecasting markets and how consensus can shift quickly. Sector and stock-level winners/losers (Priority: 4/5): They highlight energy as the dominant winning sector in 2022 and point to huge losses in growth favorites like Tesla, Nvidia, Meta, Amazon, and Netflix. This serves as evidence of valuation resets after the pandemic boom. 2023 macro outlook: recession, Fed, inflation, and bonds (Priority: 5/5): The hosts debate whether the economy can avoid recession, whether the Fed will pivot, and whether bonds can resume their role as a diversifier now that yields are much higher. Retail behavior, meme stocks, and speculative excess (Priority: 4/5): They discuss continued retail enthusiasm for Tesla, ARK, AMC, and crypto despite large losses, arguing that many investors hold on to hope longer than expected and often underappreciate risk. Everyday life, housing, and consumer tradeoffs (Priority: 3/5): The conversation extends to housing affordability, bigger cars, travel costs, and changing work norms, with the hosts arguing that many modern conveniences have become viewed as necessities.

Key Arguments: 2022 was historically bad for a classic 60/40 portfolio, but the absence of a recession made the damage feel less catastrophic than it could have been. For investors still contributing, falling asset prices can be beneficial because they allow new money to buy at lower valuations and higher yields. Many 2022 market moves were a valuation reset after extraordinary 2019-2021 gains, especially in mega-cap tech and speculative growth stocks. Forecasting is extremely hard; even intelligent, data-driven predictions can miss because markets react to surprises no one can foresee. Bonds may again be useful diversifiers because yields are much higher than in 2021-2022, creating more cushion against price declines. Retail investors often remain committed to losing themes like ARK, Tesla, and AMC longer than outsiders expect, suggesting behavioral inertia is powerful. Housing may not crash, but higher mortgage rates can still produce meaningful price declines; the path of rates is the key variable. A recession is less likely if real incomes are rising and transfer-adjusted purchasing power continues to improve, but Fed over-tightening remains the main risk.

Data Points: S&P 500 annual decline: about -18% in 2022 - Used to describe one of the worst years for U.S. equities since the 1920s 60/40 portfolio ranking: 3rd worst year ever - For a portfolio split between S&P 500 and 10-year Treasuries Bloomberg Aggregate bond index: worst year ever, -13% - Historical worst performance for the broad U.S. bond benchmark 10-year Treasury total return: down roughly 15% or more - Described as the worst year ever for 10-year Treasuries back to the 1920s 10-year Treasury yield annual change: 2% was the highest change since 1960 - A chart noted how unusual the 2022 yield move was historically Global stocks and bonds market loss: more than $30 trillion - Referenced as total wealth lost across global financial assets Tesla annual returns: +26% (2019), +743% (2020), +50% (2021), -65% (2022) - Illustrates extreme boom-bust behavior in a single stock Mega-cap market cap basket: about $6T pre-pandemic to $12T+ at peak, then under $7T - Apple, Amazon, Microsoft, Google, Meta, Nvidia, and Tesla

Pivotal Quotes: "the great inflation" — Michael: His proposed label for 2022 while discussing year-end framing "For people that are still investing money into the stock market, any declines are a blessing because it literally allows you to buy more at lower prices." — Ben: On why continued investing benefits from market drawdowns "I think dabbling is code for obsessive addictive behavior." — Ben: On new investors who got pulled deeply into the market during the meme-stock era

Implications: Listeners should expect continued volatility, but also recognize that higher yields and lower valuations may improve future returns. The episode argues for patience, discipline, and regular saving over forecasting or chasing hot themes.