It’s the time of year when we see a lot of predictions about what might happen over the next 12 months. Reading some of these articles can be enlightening, even beneficial, to a trading strategy. But as we enter 2023, there is a sense – at least there should be – of going into unknown territory. After reading through many of these articles predicting what is coming, you might feel a sense of confusion, with plenty of column inches given to both optimism and pessimism, although the latter is more frequent on balance.
And yet, perhaps the most sobering way to enter Q1 2023 is to look back at some of the predictions from the 1st of January 2022. There might have been some pessimism in the pieces that you read, but very few analysts were saying that we would experience the worst year for Wall Street since the Great Financial Crisis of 2008. Few people were saying that the likes of Amazon, Tesla Inc, Meta, and Alphabet – titans of the bull market – would lose trillions of dollars in value. Of course, we can find those who got their sums correct in hindsight, but for every analyst who sounded the alarm, you can find ten more who were calling them doomsayers.
Predictions Based on Past Cycles Can Be a Gambler’s Fallacy
But one of the problems we have with making predictions is that we all too often become chained to the past. We see symmetry and then tell ourselves to believe that the pattern must repeat. Sometimes we fall into the trap of the gambler’s fallacy. That is to say that if you spin online slots or place a bet on a roulette wheel, you believe that a losing spin means the next spin is more likely to win, even though they are independent events.
Of course, we do know in finance that there is more than the gambler’s fallacy at play. Past events do influence the future, but there must be some sort of tempering over how much that influence is. For instance, right now, we have a lot of talk about Bitcoin’s four-year cycle. 2022 was a correction year for the digital asset, as was 2018, and 2014 before that. The other three years in the cycle saw huge gains YoY for Bitcoin investors. Proponents of Bitcoin point to the patterns leading up to the next halving event (2024) as proof that the four-year cycle exists, and thus that 2023 would be a good year to accumulate.
The Goalposts Have Been Moved with Inflation and Interest Rates
But there are problems with blindly believing in the Bitcoin four-year rule, and some analysts have pointed to the fact it might be one of the biggest myths in finance. For a start, the cycle rule only extends back to the dozen or so years that Bitcoin has been in existence, so it’s not long enough to merit a “rule”. Moreover, there are factors in play that were not present as Bitcoin performed these moonshots in the past. Most notably, high-interest rates and high inflation. And we should also point to the specter of regulation.
The point, as such, is that we are entering a period of high uncertainty. Talk to the optimists, and they will tell you that inflation will start to come down, and then the Fed (as well as other central banks) will start pivoting on interest rates. Furthermore, some believe that a global recession will trigger the money printers again. However, none of this is guaranteed. We assume inflation will cool – it has been cooling in the US – but we do not know to what extent. The US economy and jobs market is still hot, and there is every chance that the fabled recession does not come or is so shallow that it does not prompt the Fed to act.
Optimism is a good thing for the markets, but it should be tempered with realism. And the realism of today is that we are heading into the unknown. Many believe that 2023 should be better than 2022, simply due to the fact that the year gone by was such a tough one for the markets. But as we mentioned earlier, a losing spin in a casino does not mean that the next one is more likely to be a winner.
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