Worst Wall Street Investing Mistakes of 2023: The expectations of American market experts confirmed that stocks would fall, bonds would rise,
and a recession would arrive. The S&P 500 index rose by 5% in January, contrary to the expectations of all experts, which confirmed that it would fall strongly.

Topics

Expectations of the largest American banks
Failure of expectations

Recession traps and high-interest rates

S&P 500 Index

Growing pessimism

Bond experts

China’s economy

Conclusion

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Expectations of the largest American banks

At the end of the year 2022, the situation was very bad on Wall Street, as everyone was preparing for a recession, believing that it was coming without a doubt.

Mike Wilson, a strategist at Morgan Stanley, who preferred a decline in stocks, expected a decline,
while at Megan Swiber Bank of America, was asking clients to prepare for a decline in Treasury yields,
while at Goldman Sachs, Kamakshi Trivedi, one of the strategists, was encouraging increased investment in Chinese companies.
After the Chinese economy recovered from the consequences and impact of the Corona pandemic and closures.

Consequently, Wall Street issued a formula common to all forecasts, which encouraged selling US stocks and buying Treasury bonds and Chinese stocks.

Failure of expectations

The expectations failed and the consensus was completely wrong. What was expected to fall rose, and what was supposed to rise fell.
Contrary to the consensus and expectations, the S&P 500 index rose by 20%, and the Nasdaq 100 index rose by more than 50%.
This is the largest rise. On an annual basis since the period of the “Dot-com bubble,”
which is the period in which the shares of technology and Internet companies in the United States witnessed a significant rise in value and then a sharp decline in value.

More importantly, it shows how the economic forces unleashed during the pandemic—essentially increasing consumer demand,
boosting economic growth and driving inflation—continue to fascinate the financial and political community in Washington and beyond.
It also puts the sellers, known to prominent Wall Street analysts, in an awkward position before investors around the world who pay for their opinions and advice.

“I’ve never seen a consensus forecast as wrong as in 2023,” said Andrew Pace,
director of investment strategist at Russell Investments, which manages about $290 billion in assets. “Look at the sell side, they’ve all failed.”

Recession traps and high-interest rates

Asset managers like Russell have defied the odds and delivered strong results, with stocks and bonds earning slightly better than their benchmarks.
To be clear, Pace’s predictions were not as successful as the biggest sell-side promoters.
The main reason behind his mistakes was the same reason that prompted them to do so; It was the urgent feeling that America was heading towards recession,
as was the case in the rest of the world.

This makes sense because the Fed is amid its most aggressive interest rate hikes in decades, and a decline in consumer and business spending seems certain.

However, there is little evidence of this yet. Indeed, growth has accelerated this year as inflation has declined.
Add some developments in artificial intelligence, the new hot topic in the world of technology, and you have the right mix for a bull market.

S&P 500 Index

The year started well, with the S&P 500 rising 5% in January alone and 16% by midyear.
At the time, slowing inflation sparked widespread speculation that the Federal Reserve would begin adjusting interest rates and a rate hike was imminent,
and the pace of rate hikes accelerated again in November, bringing the index close to its all-time high.

However, Wilson, chief US equity strategist at Morgan Stanley, stood his ground.

His forecast of a stock market decline in 2022, which few people believed would be true,
helped him earn the highest portfolio strategy rating in the Institutional Investor survey for two years in a row.
Wilson stuck to the pessimistic forecast and said that stocks will fall sharply in early 2023, and even if they rise in the second half of the year, there will be no significant change in the end.

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Growing pessimism

Many people joined him. A massive wave of selling last year in response to rising interest rates sparked panic among strategists.
By early December, they expected stocks to decline again in the new year, according to the median forecast among Bloomberg survey respondents.
Consensus forecasts of a potential decline like this have not occurred for at least 23 years.
Even Marko Kolanovic, a strategist at JPMorgan Chase, implicitly endorsed this view, insisting through most of 2022 that stocks were on the cusp of a rally.
These pessimistic trends continued into the following year, as average expectations for the S&P 500 saw a slight rise.

Wilson has become the public face of the pessimist class, convinced that corporate profits will deteriorate as they did in 2008.
While traders are betting that lower inflation will benefit stocks, Wilson has warned against the opposite,
suggesting that a continued slowdown in the economy could squeeze corporate profit margins.

 In January, he said that even the pessimistic consensus on Wall Street’s outlook was too optimistic, and he predicted the S&P would fall more than 20% before eventually rising again.
A month later, he warned clients that the reward-to-risk ratio had fallen to its lowest levels during a bear market.
In May, when the index rose about 10%, he urged investors not to be fooled. “That’s what happens in a down market,” he said.
“It’s built on tricking you, confusing you, and forcing you to do something you don’t want to do.”

Bond experts

Similar opinions are widespread among leading bond experts. Treasury yields rose in 2022,
raising borrowing costs for consumers and businesses after the Federal Reserve ended its near-zero interest rate policy.
It all happened So quickly that it was thought that certain sectors of the economy were doomed to collapse, pushing them into recession.
When that happens, bonds will rise as investors flock to safe-haven assets, and the Fed will come to the rescue by resuming monetary easing.

So Swiber and her colleagues on Bank of America’s interest rate strategy team, like the vast majority of analysts,
big gains for bond investors who have just suffered their worst annual losses in decades.
The bank is one of the few institutions calling for a reduction in the benchmark 10-year bond yield to 3.25% by the end of 2023.

For once, it looked as if it would happen soon. The collapse has already happened,
with Silicon Valley and several other banks filing for bankruptcy in March
after suffering huge losses in fixed-income investments as the Federal Reserve raised interest rates, and investors braced for the crisis to escalate.
Which will hinder economic growth. Stocks fell, bonds rose, and the 10-year bond yield fell below Bank of America’s target.
“The idea is that this will act as a tailwind to expectations of a deeper recession,” Swiper said.

China’s economy

 The Fed successfully contained the crisis, and yields resumed their steady rise throughout the summer and early fall as economic growth resumed its acceleration.
The late-year rally in US Treasuries has brought the 10-year yield down to 3.8%, where it was last year.

Swiper said the year was a lesson in humility, not only for her but for analysts as a whole.

Meanwhile, Wall Street received another lesson in humility in overseas markets
as Chinese stocks rose in the final two months of 2022 as the government ended pandemic restrictions.
As the economy opens up, strategists at banks, including Goldman Sachs and JP Morgan, expect China to lead the recovery in emerging market stocks.

Trivedi, global director of currencies, interest rates and emerging markets strategy at Goldman Sachs,
based in London, admitted that things were not going as expected. The world’s second-largest economy
is faltering as the housing crisis worsens and fears of deflation increase. Instead of flowing in,
investors exited, sending Chinese stocks lower and dragging gains in emerging market indexes lower.

“The support from reopening dissipated very quickly.
The net positive impact of reopening was small and we did not see the same growth rebound in other parts of the world,” Trivedi said.

Conclusion

Meanwhile, US stocks continued to overcome pessimism. By July, Wilson admitted that he had been pessimistic for too long,
saying: “We made a mistake in not expecting equity valuations to rise as inflation eases and companies cut costs.”
However, he remained pessimistic about corporate profits. Saying that the stock price is unlikely to rise in the fourth quarter.

Although the Fed did not change interest rates for the second time at its meeting in early November, it sparked a rally in stocks and bonds.
The pace of gains accelerated this month after monetary policymakers signaled they had finally ended the phase of raising interest rates,
leading traders to anticipate multiple rate cuts next year.
Markets have repeatedly gotten this fundamental shift wrong over the past couple of years, and they may now be making mistakes again.

Doubts are spreading among some Wall Street sellers. Gennady Goldberg,
head of U.S. interest rate strategy at TD Securities, said he and his colleagues are doing some soul-searching as the end of the year approaches.
TD is among the companies that expect big bond gains in 2023. “It’s important to learn from your mistakes,” Goldberg added.

What did Goldberg learn? The economy has been much stronger than he expected and better prepared for higher interest rates.
However, he remains convinced that a recession is coming and will happen in 2024, when bonds rise.

Worst Wall Street Investing Mistakes of 2023