Date: January 7, 2023

2023 Fearless Forecast – Year of the Bull

Intro to the Fearless Forecast

Each and every year, I spend some time in Q4 collecting my thoughts about how I see the next 12 months unfolding in the financial markets, economy, etc. While I do really enjoy looking into my super secret crystal ball as I do throughout the year, I also know that it’s a fairly futile exercise to forecast 12 months out.

First, we do not manage client portfolios according to my opinion in any time frame. And second, based on the evidence at hand, I am certainly not arrogant enough or dumb enough to dig my heels in on any forecast. And as we saw with the pandemic, sometimes, life throws us curve balls and we have to adjust on the fly. Interestingly, my 2020 Fearless Forecast turned out to be one of my most accurate. Go figure.

I will say this, though. Whether by a lot of luck or by a little skill, I haven’t seen anyone achieve the hit rate that I have with annual forecasts. I don’t equivocate. I don’t use the ole, “on the one hand…”. And I never revise history nor argue that the market was wrong.

I will put my Fearless Forecasts against anyone on Wall Street and beyond. I have meticulous annual forecast records going back 32 years and it’s embarrassing how strategists almost always choose some single digit return number on either side of the long-term average return as a security blanket. And when the year goes against them, they just “revise” their year-end target like so many did in 2022. Media darling Ed Yardeni began the year at S&P 500 5000. He then revised his year-end target not once but twice. And then celebrated being right in the end. No credibility. No accountability.

I don’t mind putting myself out there with the possibility of falling flat on my face nor do I ever run from a poor call or forecast. My Twitter tweets are full of mea culpas. I have made a career’s worth of mistakes over the past 33 years and I am sure there are more to come. It’s all part of the forecasting game.

Nevertheless, it’s a fun issue to write and I always look forward to grading last year’s forecast as well as hearing from readers along the way.

So, without further torture, here are my forecasts for 2023.

U.S Equities

The stock market begins 2023 with strong headwinds of sharply higher interest rates, stubbornly high inflation, weakening economy and a dogmatic Federal Reserve. Those do not sound like ingredients for a bull market or positive year. But that’s exactly what I see ahead. 2023 will be green for the stock market. How the markets get from January 1 to December 31 is the interesting question.

Overall, I see three viable scenarios. If the Fed engineers the elusive “soft landing” in the economy like 1995 after raising interest rates from 3.25% to 6% in one year, the stock market soars 20-30% in 2023. Let’s not forget that by the time the Fed ceased with the rate hikes in Q1 1995, the stock market was at all-time highs.In this scenario, the October 2022 bottom was the ultimate and final bear market low and the market is off to the races.

Scenario #2 assumes a mild recession which was largely priced into stocks in 2022. The stock market sees a double digit year with returns between 10% and 19%. In this scenario I leave open the possibility that stocks revisit and perhaps gently breach the Q4 2022 lows, but that does not need to happen.

Finally, a deeper than expected recession hits and the stock market fully exceeds the October bottom on the way to a 15-20% correction in Q1 and/or Q2, resembling 2009. And in this case the stock market still ends the year 5-8% higher.

There are a number of historical studies to use when looking at 2023. In the past 75, the stock market has been higher from the midterm election through April 30 every time but one for a 95% hit rate. The S&P 500 was 3828. The first 7 months of a post-midterm election year (MTEY) have not been down since WWII. That’s 3840 on the S&P 500.

Post-MTEYs on the whole are the strongest of the four years of a presidency. Not a single one has been down since Germany invaded Poland in 1939. That’s 21 straight positive pre-election years for the stock market in the face of recessions, wars, inflation, high interest rates and much more. 21 straight! To go a step further, when the MTEYs was weak like 1962, 1966, 1974, 1990, 1994, 2002 and 2018, the following year averaged 30%. I think you would agree that 2022 can be considered a “weak” year.

It is very unusual to see back to back down years for the stock market. Since WWII ended, the only consecutive negative years for stocks were 1973-1974 and 2000-2002 which was three straight in the red. We also know that Wall Street strategists’ forecasts are among the most bearish in decades. When there is consensus in this group, it is usually wrong.

On the index front the venerable Dow Jones Industrial Average will be the laggard in 2023. Looking at the sectors, the semiconductors make a big comeback and energy lags. Biotech is one of the big winners in 2022. International investing makes a long-awaited comeback in 2023, performing equal to or better than the U.S. overall with emerging markets leading the way.

As many of you know, when I have high conviction on something, I always try to understand what can go awry. How will I be wrong? I like to ask some close industry friends to poke holes in my thesis.

On equities, I will be wrong if there is a credit event, meaning something blows up in the bond market, likely from a much weaker economy than I forecast. I can also be wrong if the 2022 bear market was mostly due to stocks being repriced for higher interest rates and lower valuations and not from impending economic weakness. In other words, the mild recession ahead is not at all already factored into stock prices.

And if you are thinking of a way to get a head start on knowing, let’s just watch the reaction to companies who pre-announce or warn of earnings issues coming in Q1. Everyone knows that corporate America has some trouble. And most companies with issues who do not pre-announce before their earnings release will likely warn about Q1 when they release Q4 earnings beginning next week.

The absolute key is how bad the damage is, if any. If stocks fall hard on the bad news then it is likely that the recession is not already priced in. That would eliminate scenario #1, the most bullish one. If stocks limit losses or even rally, it will be a very good sign that 2023 will be the year of the bulls.

In the end, the S&P 500 closes up 2023 15-20%. Anyone as bullish as me?

Fixed Income

I haven’t been this excited for fixed income since March 2009. All reasonable scenarios lead to higher bond prices and lower yields. By “bonds”, I am referring to treasury and investment grade corporates. If the Fed engineers the soft landing then bonds go up mid single digits. If there is a mild recession, bonds finish 10% higher. In a deeper recession, bonds jump 12-15%.

High yield or junk bonds are also in for a strong year which could approach double digits. Remember, since this sector was created in the 1980s, junk have never closed down two straight years. While that streak will be broken at some point, I do not see it happening in 2023.

How will I be wrong?

The economy does not slow down and inflation re-accelerates. The Fed is forced to ramp up rate hikes. On high yield, there is a deep recession with a credit event that leads to soaring defaults.

In the end the bond market closes 2023 up 10% with the yield on the 10-Year below 3%.

Oil & Gold

On March 8, 2022 I penned a piece calling for the top in oil. Little did I know that crude oil saw its bull market high right then and there. The energy trade is over, for now. 2023 will be a quieter year for oil with a trading range between $65 and $100. Gold, on the other hand, saw its bear market bottom in Q4 2022. $2000 gold is seen in 2023 with a reasonable chance for all-time highs unless the economy really gets going again.


In 2022 I was steadfast that the U.S. economy would not see recession. I argued ad nauseam with folks who proclaimed that because Q1 and Q2 saw negative GDP growth that was recession. 2023 will not be as kind economically. With every yield curve relationship inverting in 2022 and the 3 month/10 year finally joining the party, the countdown has begun. The U.S. economy sees a mild recession beginning in late Q2 to early Q4 and lasts for two to three quarters.


Lord, I dislike the Fed. While I respect the institution the wrong people are running it and involved. At some point last year, the vast majority of voters did not have any relevant real world experience, just academics. That’s not how the lender of last resort should be constituted. When I think about the last four chairs and their epic blunders, how can anyone have confidence in what they do. From Jay Powell calling inflation “transitory” to Janet Yellen proclaiming that there would not be another financial crisis in her lifetime to Ben Bernanke concluding that subprime mortgages would not lead to systemic contagion to Alan Greenspan causing too many market driven catastrophes to count, the Fed has simply failed at every extreme.

In 2023 the Fed’s rate hike cycle ends. The seeds were sown when the Two-Year Note crossed below the Fed Funds Rate in late 2022. Now, we wait for the Two-Year to close below 4% and stay there. In 2023, the Fed has one, possibly two rate hikes left and then they pivot to neutral. Given Powell’s blunder with inflation, the Fed is late to react to the weakening economy and does not become dovish until late in 2023 if at all.

Bitcoin & Cryptocurrencies

My long-awaited and anticipated crypto collapse finally happened in 2022. And just like the Dotcom Bubble which I often compared it to, the end is usually fraught with fraud and crisis before regulation. Crypto is now in that disdain phase where few want to even speak about it. The bulls lost most of their money. The bears have nothing left to say. 2023 is kind to Bitcoin, the granddaddy of the sector. For those who have been waiting years to buy, I think a reasonable strategy is to dollar cost average in over the next 12-15 months, but also keeping the total allocation to low to mid single digits in your portfolio.


With the House going very mildly red, very little legislation is accomplished in 2023. Investigations increase and get nowhere. The parade of Republican candidates grows by the month, even though President Biden begins his reelection campaign. Democrats quietly float trial balloons on primarying Biden. Former President Trump’s grip on the GOP diminishes month by month and he falls out of the top three by year-end.

And so, this concludes my 2023 Fearless Forecast. Some things will be eerily spot on; others will be embarrassingly wrong. I never mind being part of the giraffe club and sticking my neck out. You cannot hit the baseball without swinging the bat. Thanks for reading…

P.S. I am not making any forecasts about my Yankees, Cowboys or UCONN Huskies. They’re usually wrong anyway! Okay, maybe I will. The Cowboys win a single playoff game and then fail, again. The UCONN men’s basketball team wins three games and the run ends at Elite 8. The women’s team earns its record 13th trip to the Final Four but is unable to achieve their 12th championship. The Yankees make it to the league championship series, but fall short of the World Series.


Paul Schatz, President, Heritage Capital