Note: This article was written on January 12, 2023, and the data may deviate from the current market conditions.
1. Macro
Macro data and events have a significant impact on the market, and there will be sharp fluctuations when the data is released.
Inflation
In 2022, affected by easing, war and supply chain, US inflation hit a 40-year high. Judging from the data, inflation has peaked, but it is still far from the Fed's target of 2% to 3%.
Update: At 21:30 Beijing time on January 12, the US December CPI annual rate of 6.5% was in line with expectations, and the core CPI of 5.7% was in line with expectations. Inflation fell further. It is expected that the positive impact of relevant data will gradually decrease in 2023.
Rate hikes
In 2022, the Federal Reserve raised interest rates seven times in a row, and the federal funds rate rose from 0%~0.25% to the current 4.25%~4.5%.
In 2023, according to the CME FedWatch Tool, the market believes that the most likely path is a 25bps rate hike in February and a 25bps rate hike in March, followed by maintaining interest rates at 4.75%-5% until the end of the third quarter of 2023 (maintaining high interest rates for about half a year), with the first 25bps rate cut occurring in November 2023.
If the market's expectations are true, then a new round of easing cycle will begin at the end of 2023, and the market may react in advance at the end of the first quarter.
But there is a contradiction between the market and the Federal Reserve. According to the December FOMC meeting minutes and the dot plot, the vast majority of Fed officials raised their interest rate peak, that is, the terminal interest rate expected level to above 5%, suggesting that the pace of rate hikes will be slower but interest rates will eventually be higher, and no participant expected that it would be appropriate to start lowering the federal funds rate target in 2023.
The Fed's decision is based on the goal of inflation falling back to 2%, but the market is currently singing a different tune from the Fed. The market believes that the recession caused by excessive tightening will force the Fed to start cutting interest rates ahead of schedule.
Balance Sheet
The original plan was that the monthly reduction limit in the first phase (June-August 2022) was US$30 billion in Treasury bonds and US$17.5 billion in agency bonds and mortgage-backed securities (MBS), and the monthly reduction limit in the second phase (starting in September) was increased to US$60 billion in Treasury bonds and US$35 billion in agency bonds and MBS. The condition for stopping the balance sheet reduction is to slow down and stop the balance sheet reduction when the reserve level is slightly higher than the "ample reserve level" considered by the Fed.
The Fed's balance sheet reduction is proceeding as planned, and the size of the Fed's balance sheet has dropped from nearly $9 trillion to about $8.5 trillion, but Powell hinted in a speech at the end of November that the Fed will manage its balance sheet in a way that may lead to an early end to the balance sheet reduction.
The overall impact of balance sheet reduction is not significant, and its impact on the market is smaller than that of interest rate hikes, so it receives less attention.
The New York Fed's November survey showed that the market generally expects the Fed to stop shrinking its balance sheet in the third quarter of 2024, which is roughly consistent with our expectation that QT will end in mid-2024 as the Fed begins to see problems with reserve shortages.
However, some institutions believe that the balance sheet reduction will slow down or end by the end of 2023.
The following is some of the organizations’ outlook for 2023:
a. 高盛 Macro Outlook 2023: This Cycle Is Different
The U.S. economy has avoided recession, GDP has maintained growth, and unemployment will not rise significantly. However, the Federal Reserve will not be dovish. It will continue to raise interest rates three times by 25 Bps in 2023 and will not cut interest rates.
b. Morgan Stanley：2023 Investment Outlook
As Fed tightening continues, capital costs rise
The economy is in a mild recession, corporate profits are squeezed, and performance is declining. We are optimistic about equity investment in the long term and pay attention to companies with business moats.
c. JPM： A bad year for the economy, a better year for market
The Fed is unlikely to cut interest rates in 2023, and the intensity of balance sheet reduction will be weakened; the US and Europe will experience a mild recession, and the Chinese economy and emerging markets are optimistic; a mild recession has been priced in by the stock market, and even if the bottom has not been reached, the stock market will not fall sharply in 2023, and the risk-return ratio will also improve (because the decline in 2022 was too much), and the annual outlook is bullish
d. 美林：2023 Year Ahead: Back To The New Future
Q1 economic data deteriorated across the board, and the Fed stopped raising interest rates; the economy will experience a mild recession in 2023 (already priced in by the bond market), and the Fed's shift (rate cuts) will occur at the end of the year, and corporate profits will decline; stocks will perform well in the second half of the year, and the 60/40 strategy will have excess returns; a bull market will begin in 2023
e. BlackRock: A new investment playbook
Western economies are in a long-term mild recession. European and American stocks are underweight. The decline in valuations and earnings brought about by the recession has not yet been priced in. We are neutral on Asia. China is maintaining steady growth (which cannot boost the global economy). We are optimistic about Southeast Asia.
Allocate high-rated corporate bonds in developed countries and invest in inflation-linked assets to fight recession
f. Credit Suisse analyst Zoltan Pozsar: War and Commodity Encumbrance
As economic wars (such as China-Shanghai cooperation) impact the dollar system, the United States will restart quantitative easing (referring to the central bank's purchase of government bonds) in the summer of 2023
The 60/40 stock-bond strategy is ineffective and should be changed to 20/40/20/20, corresponding to cash, stocks, bonds and commodities respectively.
g. Michael Hartnett, Chief Strategist at Bank of America
In 2023, the global economy will experience a mild recession, the inflation rate will decrease, China's economy will recover, interest rates, yields, interest rate spreads, the US dollar, and oil prices will reach their peaks, the US stock market will remain flat, and the price of gold will rise.
The US CPI and PPI have reached their peak, and interest rate hikes have led to stagflation. US assets will perform worse than the global average in 2023. The corresponding strategy is to short the US dollar and go long on emerging market assets.
Bearish on risky assets such as stocks in the first half of the year, bullish on long-term US bonds
h. Eric Robertsen, Chief Strategist of Standard Chartered Bank - 2023 Black Swan
In the first half of the year, the United States fell into a severe economic recession, corporate bankruptcies and rising unemployment rates, risk assets plummeted (Nasdaq fell 50%, BTC fell 70% to 5,000), oil prices plummeted 50% (recession + Russia-Ukraine conflict), the US dollar plummeted and the euro rose, and deflation eventually triggered a global recession.
Republicans impeach Biden before 2024
The Fed stops QT, cuts interest rates by 2%, and shifts to an easing stance
summary:
Inflation has peaked and started to decline, but the timing of the easing cycle is difficult to predict. There is a contradiction between the market and the Fed's statements. Institutional attitudes are both bullish and bearish, with more agreeing that the economy will experience a mild recession and continued liquidity tightening.
There are a lot of data, news and factors to consider in macro factors, and the logical chain of information transmission to price is very complicated. At this point in time, instead of predicting the good or bad macro data, it is more likely to pay attention to market price behavior directly. Although it reduces the return, it is relatively safe.
Combining the views of the above-mentioned institutions and star analysts, economic recession will lead to a general decline in risky assets (declining profits, bankruptcies, etc.), and continued high interest rates and balance sheet reduction may cause deflation, which is also unfavorable to risky assets.
2. US stocks
U.S. Stock-Crypto Market Correlation
The crypto market has been deeply affected by U.S. stocks. Based on observations in 2022, it will even follow the trend of U.S. stocks at the minute level. During the U.S. stock trading period, the crypto market will also be significantly active, with volatility and trading volume increasing.
Traders treat the crypto market like U.S. tech stocks.
US stocks - Valuation cuts in 2022, earnings cuts in 2023
The major U.S. stock indexes had their worst year since 2008.
For the full year 2022, the Dow Jones Industrial Average fell 8.8%, the S&P 500 fell 19.4%, the Nasdaq fell 33%, and the Russell 2000 fell 21.7%.
The Nasdaq fell far more than the average, mainly because technology stocks were greatly affected by interest rate hikes and their valuations fell (PE fell 40%, similar to 2008); and if there is a recession in 2023, corporate profitability is expected to decline, and the Dow and S&P will have downward momentum.
Looking at the chart, the S&P 500 is still in a downward trend, with the lowest point in 2022 around 3491. It is currently suppressed by the red downward trend line. If it cannot break through, the probability of touching 3600 again is very high.
If it breaks through the suppression and short-term high of 4100, it will be treated as a reversal and turn to a bullish mindset.
Carving a boat to look for a sword:
Referring to the market situation from 2007 to 2009, the S&P fell 56% from its peak in October 2007 to bottom in March 2009 (about 74 weeks), and then rebounded 45% from the bottom to confirm the reversal at the end of July 2009 (about 20 weeks).
From the end of 21 to the low point in October 22, it fell 27% (41 weeks). If we use the method of carving a mark on a boat to find a sword to estimate the time, the bottom will probably be in June 23, at 2,400 points.
Michael Hartnett Prediction
When we made plans for the fourth quarter of 2022 at the end of September, we mentioned:
"There are also differences in Wall Street's current bottom forecasts (based on inflation falling to 5% and unemployment rising to 4%). The bottom forecasts for the S&P 500 index range from 3,000, 3,300, 3,400, and 3,600 points. Michael Hartnett, who has the highest accuracy this year, believes that a bottom position can be established at 3,600, an increase in positions at 3,300, and a full position at 3,000. Currently, the S&P 500 index has broken the previous low, with the lowest being 3,623."
After that, the S&P 500 fell to a low of around 3,500 in October and closed at 3,983 on January 12. If the transaction was carried out in full accordance with Micheal's plan, the current floating profit of the base position would be 10%.
At the end of 2021, Wall Street was bullish and shouted the slogan of "interest rate hike bull". Michael was one of the few big shorts and predicted the plunge in the first half of the year. But he is not an analyst who is "always bearish and always right". In July, he predicted the S&P rebound to 4,200 points, and at the high point, he predicted the worst September in history. He almost bet on all the big bands in 2022, and the predicted points were very close. He is known as "the most pessimistic but most accurate analyst on Wall Street."
He predicts that risk assets will fall significantly in the first half of 2023, and the annual return on US stocks will be 0%. We understand that the current position is a relative high point of the rebound, and there is a high possibility of a correction in the next six months. We can continue the position-building plan at the above key positions.
In terms of specific configuration and return rate, he shorted US technology stocks on the grounds that they are overvalued and the era of loose monetary policy is over; he went long on the Chinese stock market on the grounds of excess savings by residents; his expectations for the return rates of the following assets are positive: copper 25%, gold 15-20%, investment-grade corporate bonds 12-13%, 10-year US Treasury bonds 7-8%, oil 5-6%, cash 5%, US stocks 0%, and US dollar -6%; commodities and emerging market assets have the highest returns in terms of dollar peak and inflation hedging.
Mike Wilison Prediction
Like Michael, Mike was one of the few big short sellers at the end of 21. In the subsequent market, he turned to bullish in July and predicted a bottoming rebound of 3700~4200. In early December, he predicted the recent high point of the rebound from November to December at 4100~4200, and predicted a pullback to 3800 points.
Mike is relatively pessimistic about his forecast for 2023, believing that the S&P will fall to 3,000 points, mainly based on the following logic:
1) Actively managed funds in the U.S. are reducing their holdings
2) The dual logic of falling valuations due to austerity and falling earnings due to recession. He believes that the current market estimates EPS too high. The actual situation is similar to that in 2008. The decline in performance has led to a decline in stock prices, but the market has not yet priced this in.
3) He predicts that the stock risk premium will continue to rise, which means that the current price is not attractive enough and there will be subsequent declines.
We tend to trust their subsequent judgment in 2023 and continue to follow up.
Crypto Stocks and BTC
In addition to the extremely high correlation, the volatility of crypto-related stocks is even higher than that of BTC itself, and they have greater elasticity; but COINBASE has not shown any comparative advantages since its listing (probably because it entered a bear market shortly after its listing), and its fluctuations are almost synchronized in time.
Possible reasons:
1) Listed companies are affected by more factors such as operating conditions, performance, competition, and supervision;
2) The decline of BTC in the first half of the year was not greatly affected by expectations of macro-interest rate hikes (shown in the fact that the supply of stablecoins did not decrease significantly), while the opposite was true for US stocks;
3) Stocks of listed companies are more easily accessible and traded by institutions.
COIN, daily chart
Coinbase price has rebounded by about 40%+ from its lowest point. Cathie Wood purchased about $3 million worth of shares in December, which may be a performance of the market bottom. If the rebound continues to be strong, it can be considered that the bottom has appeared and the bulls have reversed.
However, Bank of America downgraded Coinbase's rating and adjusted its target price from $50 to $35, citing the bleak outlook for the crypto market in 2023 and the company's performance will decline.
summary:
According to analysts' predictions, the U.S. stock market may bottom out in the first half of the year, with positions on the left side at 3600, 3300, and 3000, and a reversal may occur in the second half of the year.
The returns from bottom-fishing Coinbase stock may be better than directly bottom-fishing BTC itself.
3. Crypto Market
The total market value of the crypto market has fallen from a peak of 2.9T to the current level of around 813B. There have been significant rebounds at key levels such as previous lows and highs, but no reversal has been seen.
Total Market Capitalization by TradingView, Weekly
BTC and ETH trends in 2022
The macro-negative factors combined with the negative events in the crypto market itself caused the key support level for the rebound during the plunge to be broken through by the next new black swan.
BTC&SP500, 2022 daily line
The birth and design mechanism of BTC stems from the original intention of creating a decentralized currency and payment system, based on the concept of resisting excessive currency issuance, which is also the main narrative. Another narrative is the safe-haven attribute of "digital gold".
However, judging from the recent bull-bear cycle, the bull market comes from the liquidity spillover brought about by the US monetary easing, while the bear market comes from the liquidity tightening. Therefore, the correlation with gold is extremely low, and its tradability is far greater than its monetary attributes and narrative.
This situation is expected to continue in 2023.
ETH&SP500, 2022 daily line
Judging from the trend since the stETH incident, BTC hit a new low this year, while ETH stopped falling and rebounded before the new low. BTC is relatively weaker than ETH.
In addition to narratives such as ETH upgrades, network activities of applications such as DeFi and NFT also support their prices (deflation).
The resulting network congestion stimulated the development of L2.
Historical market rotation
Green is BTC market share, K line is BTC price, weekly line
Similar to the logic of A-shares "weight sets the stage, growth plays the show", the big market trends in the crypto market are usually initiated by BTC. When BTC goes sideways, Altcoins make up for the rise and show greater resilience.
According to historical market conditions, we need to pay attention to the price launch of BTC and make rotation timing through the Altcoin/BTC exchange rate pair.
Potential negatives: DCG & Genesis bankruptcy, exchange Gemini bankruptcy
Potential positive: Grayscale sues SEC for passing BTC spot ETF
Stablecoin Liquidity
The bull market is inseparable from the increase of stablecoins (injection of external liquidity), and there is a spiral relationship between prices and the supply of stablecoins.
If stablecoins stabilize and recover, the market's rise will be sustainable.
Track
Similar to our judgment on the fourth quarter of 2022, we continue to be optimistic about infrastructure, including: Ethereum & L2, L0, new public chains, and privacy
New DeFi tracks are added, mainly:
RWA: Migration of real-world assets RWA to the chain
Decentralized derivatives: GMX, DYDX, Rage Trade
Liquidity Staking
about Us
JZL Capital is a professional institution registered overseas, focusing on blockchain ecosystem research and investment. The founder has extensive work experience and has served as CEO and executive director of many overseas listed companies, and has led and participated in eToro's global investment. Team members come from top universities such as the University of Chicago, Columbia University, University of Washington, Carnegie Mellon University, University of Illinois at Urbana-Champaign, and Nanyang Technological University, and have served internationally renowned companies such as Morgan Stanley, Barclays Bank, Ernst & Young, KPMG, HNA Group, and Bank of America.
