A Market Bottom By Midyear And Nine Other Surprises Blackstone Sees For 2023

Blackstone’s strategists seem like a sporting group. Every January since 1986, they’ve put together a list of “ten surprises” that could shake up markets in the year ahead – but to qualify as an actual surprise, each one’s got to meet the team’s list of criteria. (Otherwise, where’s the fun?) So here are the team’s ten surprises for this year – and how to play each one, in case it happens.

First, what does it take to make the list?

For starters, it’s got to be something that the average professional investor sees as having at most a 33% chance of happening, but that Blackstone sees as having at least a 50% chance of happening. And the team can’t just re-up the same surprise year after year, waiting for it to pan out and make them look like geniuses. For example, the team predicted a 20% rally in the price of gold as a 2022 surprise (it rose only 14%). So, it’s not allowed to include a gold rally as a surprise for this year, even though it still has a positive outlook for the metal.

Alright, so, what surprises does Blackstone see for 2023?

1. A new kind of real rate will emerge. The Federal Reserve (the Fed), still locked in a tug-of-war with inflation, will put the word “pivot” on the shelf alongside the word “transitory”. What’s more, the central bank will be forced to move interest rates above the inflation rate – that means real rates (interest rate minus the inflation rate) become positive – a very rare phenomenon in recent years. See, Blackstone is concerned that wage inflation may be sticky and keep overall inflation from falling. And that’s the kind of thing that could force the Fed to keep interest rates higher for longer. From a stocks and bonds perspective, this is one of Blackstone’s dreariest potential surprises, so let's hope it doesn’t happen. If it does, you could consider adding a trend-following strategy like the iMGP DBi Managed Futures Strategy ETF (ticker: DBMF US; expense ratio: 0.85%) to your portfolio. I wrote about the fund in detail here.

2. Fed rate hikes will overstay their welcome. The Fed will successfully dampen inflation, but keep interest rates too high for too long. Company margins will get squeezed and a mild recession will occur. In this kind of scenario, both government and corporate bonds should perform well. For government bonds, you could consider the iShares 7-10 Year Treasury Bond ETF (IEF; 0.15%), or for high-grade corporate bonds, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD US; 0.14%). And, if the recession is mild, the riskier iShares iBoxx High Yield Corporate Bond ETF (HYG; 0.45%) should perform well too. There are UCIT-qualified ETFs for all the above detailed here.

3. The stock market will hit bottom. Despite higher interest rates, the stock market will reach a bottom by midyear, with a recovery comparable to 2009’s. This prediction’s pretty rosy, and would spell good times for the SPDR S&P 500 ETF (SPY US, 0.1%) and Invesco QQQ Trust (QQQ US, 0.2%).

4. Things’ll break. Blackstone highlights that every significant correction in the market in the past has been accompanied by a financial “accident.” Cryptocurrencies had a major correction last year and that, fortunately, proved not to be a systemic event. However, the coordinated “tightening” in financial conditions – the raising of interest rates – across the world's economies could still cause unforeseen consequences. Where the accident may occur and how severe it may be, well, those things are impossible to know, but US government bonds usually perform well in times of crisis. So the iShares 7-10 Year Treasury Bond ETF would likely perform well.

5. The almighty dollar will stay strong. The Fed will have a tougher time battling inflation than other major central banks, according to this prediction, so it’ll keep rates higher for longer. And that’ll keep the US dollar strong too, creating a once-in-a-generation opportunity for dollar-based investors to buy Japanese and European assets. If that happens, consider buying the iShares Core MSCI Europe ETF (IEUR, 0.09%) or iShares MSCI Japan ETF (EWJ, 0.5%).

6. China will strike a comeback. China will edge toward its growth objective of 5.5% and will work aggressively to re-establish strong trade relationships with the West. There would be so many ways to play this. You could consider the iShares MSCI China ETF (MCHI, 0.57%) for all-around exposure, or the Kraneshares CSI China Fund ETF (KWEB US; 0.7%) for more internet-focused exposure. This surprise would be good for commodities too, so you could consider investing in a diversified metals and mining company like BHP Group (BHP) or an ETF like the abrdn Bloomberg All Commodity Strategy K-1 Free ETF (BCI; 0.25%).

7. The US will take the lead in oil. The world’s largest economy will become not only the biggest producer of oil, but also the friendliest supplier, according to this prediction. The price of oil will drop – primarily because of a global recession, but also because of increased hydraulic fracking and greater production from the Middle East and Venezuela. And the price of West Texas Intermediate (WTI) crude will fall to $50, according to the prediction. This would be bad news for energy stocks that performed well in 2022. If a recession is the key driver of the oil price decline, then it’s likely government bonds (like those in the iShares 7-10 Year Treasury Bond ETF) would perform well.

8. Russia and Ukraine will approve a cease-fire. If this happens in the second half of the year, as Blackstone predicts, European equities hit hard by the conflict and energy crisis would be expected to do well. And you could consider investing in the iShares Core MSCI Europe ETF (IEUR, 0.09%).

9. Twitter will sort itself out. Though advertisers have shunned the site and creditors have grown skeptical about the quality of its debt, Twitter (and Tesla) CEO Elon Musk will manage to get Twitter back on the path to recovery by the end of the year. This could arguably allow him more time to focus on Tesla again – while reducing the risk that he’ll need to sell more of its shares to prop up Twitter. You could consider buying shares in Tesla (TSLA) if Twitter stabilizes.

10. Off to the races, again. In the US, multiple candidates on both sides of the aisle organize campaigns to be their party’s presidential nominee. Now this one doesn’t seem like much of a surprise, but here we are. You might have to wait until events unfold to decide how to play this one.