I hate new years

by Jared Dillian, The 10th Man

This is my least favorite time of the year. Some people look forward to a new year, with all the potential and possibilities. I don’t look forward to starting at zero and trying to think about how I am going to have a profitable year again. I’ve been doing this for a while, and I’ve had good years and bad years, with some okay years sprinkled in between. Last year was an okay year. I haven’t been genuinely happy with my performance since 2020, which was the fattest pitch we’ve gotten in decades.

Also, for the last couple of years, I’ve been asked to come up with predictions for the new year. I’m not doing that anymore. The predictions ended up being about 50% right and 50% hilariously awful. I don’t have any particular edge in predicting things 12 months out. Nobody does. It’s worth pointing out that Byron Wien didn’t come up with year-end predictions—he came up with year-end surprises. What would surprise people the most? That is usually a good way to start thinking about the year ahead.

Surprises in Store

So, what would surprise people the most? Stocks going up, for starters. I think it’s worth pointing out that I am taking as much abuse on Twitter these days for being bullish as I was for being bearish back in 2021.

Some trades are just obvious. Like, everyone knows that Tesla (TSLA) is going to trade at the same valuation as Ford (F). Everyone knows it’s going down the tubes. TSLA is a pure sentiment trade, which, in some respects, makes it easy—as Peter Atwater says, it isn’t so much a stock as it is a measurement of the fortunes of its founder, Elon Musk.

Elon has waded into this Twitter mess, and it is hurting his brand and taking up time that would probably be better spent on TSLA. People are becoming unenamored with him and looking to buy electric cars from other manufacturers. The stock is in freefall. Remember, the bear case is always most compelling at the lows.

But I happen to think this will be a decent year for stocks. We’ll be done with rate hikes in one or two Federal Open Market Committee (FOMC) meetings. The forward curve is pricing in 200 basis points of cuts. If those rate cuts are realized, things could be fun.

Recession and Yield Curve Steepening

Everyone thinks we will go into a recession. We probably will. Lots of people think this will result in the bear market getting worse. I don’t—it is already priced in. Stocks going down 25% in 2022 were priced in the recession. This has happened countless times throughout history—the stock market drops, and then we get the recession. By the time we get the recession, stocks are going up again.

What really interests me is the yield curve, which is massively inverted at the moment. One of the easiest and most obvious trades seems to be the yield curve steepener, which would result in short-term rates going down relative to long-term rates.

The bull steepener, as it is known, is one of the easiest trades in finance. I was able to successfully execute one of these at Lehman Brothers in 2007. And everyone knows that it’s not the yield curve inversion that coincides with the recession—it’s actually the steepening that follows.

Take it Slow

I could be wrong—2023 could be another terrible year. But even in terrible years, there are things to do. People tend to have a pretty strong recency bias in the markets—what happened in the recent past will happen in the future. Energy outperformed last year, so it will outperform again. That rarely happens. It will likely be something that we don’t expect. My vote is for industrials.

You’re probably reading this because you’re in search of answers. You’re reading some guru newsletter to find out the keys to success in 2023. Gurus do write those newsletters, ones which give people a sense of certainty… and then they go out and make errors.

Keep in mind we’ve been in a bear market for two years now, since GameStop (GME) peaked in January of 2021. 2021 was the year of distribution when stocks were passing from strong hands to weak hands. 2022 was the year of the bear market. Will 2023 be the year of recovery? I think there is a pretty good chance.

TSLA going down more doesn’t keep me up at night. The thing that keeps me up at night is that we’ll have another round of inflation in 2024, bigger than the last, which will result in interest rate hikes that we never thought possible. But there’s no sense in thinking about that now.

A big problem people get into is when they have a mismatch in the time horizon between their thinking and their trading. Take things one day, one week, one month at a time. The way you make 20% in 2023 is by doing it one percent at a time. You make one trade, then the next trade, then the next trade, and at the end of it, you have a pretty good year.

That is the goal.

Jared Dillian