Ten Predictions for 2023

We are pleased to share what has become a favorite research tradition here at Wavelength: predictions for the new year from our CIO, Andrew Dassori.

The past twelve months provided an important reminder that all forecasts come with plenty of uncertainty and a lot can change over the course of a year. This was certainly the case in 2022, as the Federal Reserve blew past its own projections for where it would set interest rates alongside the forecasts of every economist surveyed by Bloomberg, upending markets and disrupting a host of longstanding relationships.

Despite the widescale paradigm shift, our predictions for the past year managed to hit on many key themes driving markets, though the speed and extent of the forces at play was a common missing link. We were directionally right from the jump with our first prediction calling for growth to moderate amidst persistently above-target inflation, but we failed to appreciate how aggressive the Fed would be and the extent to which other central banks would follow uniformly down the same hawkish path. In this context, we are mindful that new risks regularly emerge in the short-term and managing these while seeking to monetize the opportunities they create is critical as we invest for the long run.

We know we cannot predict everything – acknowledging this serves us well – and we recommend that investors hedge when they have less than a 50% chance of being correct and invest where they have a clear, repeatable edge. For considerations outside of the investment process, our predictions for 2023 are listed below. We wish you great health, happiness, and luck in the year ahead.

1. Economic policy will enter a new paradigm with greater levels of differentiation.
   After months of moving aggressively in the same hawkish direction, new considerations will emerge for central banks as the impact of their policy decisions flows through markets to underlying economies. In this process, the period of synchronized global monetary tightening will come to an end, and policymakers will begin to toggle more flexibly between the growth and inflation sides of their mandates.
2. Bonds will stage a comeback amid persistent economic uncertainty.
   Following the worst year on record for the Bloomberg Global Aggregate Index, the balance of risk and return has changed meaningfully across fixed income. Markets from Treasuries to high yield credit and emerging market debt now offer yields rarely seen over the last decade, and while this one-dimensional view leaves out key factors like duration and default risk, it clearly shows a different opportunity set from what was available in the past. Alongside this new market backdrop, however, the high level of economic uncertainty experienced throughout the transition will remain intact as the sharpest policy tightening in decades sets in.
3. The technology behind ChatGPT will lead to new applications for AI entering our daily lives.
   ChatGPT made waves in the tech world this year based not only on the things it can do – such as answering questions and writing essays – but also what its foundation model framework could be used for in the future. As more people interact with this technology (which is publicly available through ChatGPT on OpenAI’s website), it will be introduced into a wider set of endeavors with the potential to transform how we approach tasks in the workplace and beyond.
4. Global supply chains will be rewired.
   After decades of globalization, supply disruptions and geopolitical tensions are bringing about new considerations for trade linkages between countries. The clearest example comes from Apple diversifying its production outside of China, but this is just the tip of the iceberg as companies seek to insulate themselves from the potential risks and disruptions identified through the pandemic.
5. Inflation will trend lower but not at the speed that markets are pricing.
   As of this writing, the latest year-over-year change in the consumer price index (CPI) was 7.1%, and CPI swaps price this to fall to around 2.5% by the end of 2023. While base effects and the continued easing of supply pressures should maintain a downward trajectory for these rates, the rapid drop expected by markets will come up against more persistent demand-driven price pressures that will keep inflation levels elevated beyond what’s priced for the coming year.
6. After losing last year’s Super Bowl, the Bengals will return to win their first championship.
   With the odds strongly favoring the Bills or Chiefs to win Super Bowl LVII, the Bengals are flying under the radar despite a 7-game winning streak that includes a December 4^th win over Kansas City. While this week’s Monday Night Football matchup against Buffalo will provide a key test, Cincinnati’s flexibility to match up with the league’s best teams puts them in a strong position heading into the playoffs where anything is possible.
7. Jeff Bezos will reclaim his role as the CEO of Amazon.
   Amazon's stock price has fallen more than 50% from its highs to pre-pandemic levels, and with Bezos as the largest shareholder, he has ample incentive to return to the helm of the company he built. Following a well-known path, taken most recently by Bob Iger at Disney, Bezos will see himself as the solution and seek to show the world he has plenty left in the tank.
8. A growing number of economists will call on the Fed to raise its 2% inflation target.
   Few people realize that the FOMC did not adopt its 2% inflation target until the mid-1990s, and even then, this was only implicit, with the official target being named in 2012. And while inflation is on its way down from its highest levels in decades, where it ends up settling remains to be seen. If this is higher than target, you can expect an increasing number of economists to question whether 2% is truly the magic number, with arguments around costs to growth and a lack of flexibility seen as central to the debate.
9. Brendan Fraser will win the Academy Award for Best Actor.
   Everybody loves a comeback and after years as an afterthought in Hollywood, Brendan Fraser has returned to prominence with his remarkable performance in the Whale.
10. As policymakers face more difficult choices, new factions within central banks will emerge.
    After a year in which central bankers were overwhelmingly united in their fight to tame inflation, the impact of restrictive policies will end up raising growth concerns as part of an increasingly difficult balancing act for economic goals. At the Federal Reserve, a dovish cohort will emerge in opposition to Chair Powell and the committee’s more hawkish members, seeking to strike more of a balance in pursuit of their dual mandate.

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