This year is shaping up to be a rollercoaster for markets. We expect volatility will be a major theme in 2023 as choppy price action and mixed signals continue to muddy the scene.

Here’s a recap of our current base case and how this year could shake out based on what we’ve seen so far:

• Risk is to the upside in the short-term (current rally could extend deeper into Q1).
• There’s a high probability that markets could reprice as the time horizon for a highly anticipated policy pivot gets extended, leading to another period of consolidation (later in Q1/Q2).
• Leading indicators are pointing to a noticeable economic slowdown by mid-year, which tends to favor bonds over risk assets as volatility rises. The push-pull between tighter monetary policy and improving liquidity conditions could cause volatility to remain elevated, especially as the US debt ceiling debacle comes to a head and concerns mount over the impact of larger fiscal deficits.
• Access to funding will remain one of the greatest risks for high-growth sectors (like crypto).
• The need for liquidity expansion will become more pressing as the year progresses. Cracks in the labor market will also become more apparent, which will give the Fed cover for a shift towards more accommodative policy.
• The reversal in Global Liquidity we cited at the end of last year will start to accelerate in response to a weaker growth outlook and concerns over growing fragilities in sovereign debt markets, acting as support for risk assets in 2H 2023.
• The impact of changes in global liquidity on financial markets tends to lag anywhere from 6-18 months, setting up a more optimistic outlook for 2024-2025.

Though the short to medium-term outlook is less clear, our long-term thesis remains squarely intact.

For more detail on how market conditions could progress this year, check out our latest markets note, “Markets Setup for Rollercoaster Ride in 2023“.