What to expect from the markets in 2023

What to expect from the markets in 2023

Looking at historical market behavior can provide valuable insights into how the market may perform in the future.

As the saying goes: history doesn’t repeat itself but it rhymes.

In 2022, both the S&P and Nasdaq were down more than 20%.

Here’s how markets performed historically after similar drops…

Nasdaq after annual drops of more than 20%

Of the 6 times the Nasdaq fell over 20% in a year, the following year saw a move of at least 20%.

In three of those years, it saw an increase of more than 20% (average +41% gains), while in the other three years, it saw a decrease of more than 20% (average -29% loss).

Year% ChangeNext Year % Change

S&P 500 after annual drops of more than 20%

The last 4 times the S&P 500 fell over 20% in one year, it was up an average of 26.5% the next year.

You have to go back all the way to the 1930s to see this trend broken.

Year% ChangeNext Year % Change

What is the “smart money” doing?

Over 300 fund managers were polled by Bank of America on their expectations and positioning for 2023.

This is what they said:

On Recession

68% of hedge funds expect a recession next year.

The best-performing sectors during a recession have historically been consumer staples and healthcare stocks.

Sector12 months after the recession starts
Consumer Staples17%
Communication Services-2%
Consumer Discretionary3%
Info Tech-4%
Real Estate-6%
S&P 5000%
Source: Goldman Sachs

On the US Dollar

51% of hedge funds expect the US Dollar to depreciate next year which is the highest since 2006.

Overall, the effect of a weaker dollar on the stock market can be complex. For companies with strong international operations reporting in U.S. dollars, this may be a welcome event since their earnings in foreign currencies translate into more reported U.S. dollars, all else being equal.

A weaker dollar also makes stocks listed on U.S. exchanges in U.S. dollars, cheaper to buy for international investors. Again, all else being equal.

On Inflation 

90% of hedge funds believe inflation will fall next year to 4.2%.

This would be a welcome sign for the markets and a necessary prelude for easing of monetary tightening which crashed the markets this year.

The biggest risks to watch out for 

  1. Inflation staying high…37%
  2. Deep global recession…20%
  3. Central banks stay hawkish…16%
  4. Geopolitics worsen (e.g Russia/Ukraine, China/Taiwan)…12%
  5. Systemic credit event…12%

The Most likely source of a financial crisis

The US shadow banking* and Chinese housing markets were seen as the most likely source of a financial crisis.

*Shadow banking is a way for people and companies to borrow and lend money without using a regular bank. Instead, they use other types of financial institutions, like investment banks or insurance companies, to help them with their money. This practice can create systemic risks because the types of financial institutions involved are not regulated as closely as regular banks.

The best-performing asset in 2023

27% of hedge funds expect government bonds* to be the best-performing asset of 2023 followed by stocks at 25%, corporate bonds at 24%, and commodities at 12%. Cash is 6% and crypto is 4%.

Since bonds are just a fancy word for interest-bearing debt, they are haram. Therefore, the best-performing halal asset in 2023 is expected to be stocks.

On Gold

A net 21% of hedge funds say gold is undervalued which is a record high and the highest since September 2018 and January 2009.

Interestingly if you look at the performance of Gold, Silver, Gold Miners (ticker: GDX), and Silver miners (ticker: SIL) in the 12 months after January 2009 & September 2018, the returns were quite good, especially for Gold miners.

Investment12 Months after Jan 200912 months after September 2018
Gold Miners22%64%
Silver Minersn/a29%

The Most Popular Region

Hedge funds are the most bullish on Emerging Markets and the most bearish on the UK stock market.


  • Whether the S&P or Nasdaq, historical performance in the year following a 20%+ drop has been more good than bad, especially for the S&P.
  • Think long-term. Yes, 2022 stunk. However, if you zoom out, the trend is clearly in the long-term investor’s favor.
  • Look for opportunities: While a recession can be a challenging time for the economy and the stock market, it can also present opportunities for investors that they may only get once or twice in their entire investing lives. Don’t squander your chance.

This article is not personalized investment advice, do your own due diligence.

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