History shows us that the biggest risks in a typical year aren't usually from out of left field (although that sometimes happens, as it did in 2020 with the COVID-19 outbreak). Rather, they are often hiding in plain sight. As goes one of my favorite quotes often attributed to Mark Twain: "It ain't what you don't know that gets you in trouble, it's what you know for sure that just ain't so." Risk appears when there is a very high degree of confidence among market participants in a specific outcome that doesn't pan out. So, by identifying the unexpected, here are our top global risks for investors in 2023, in no particular order:
- China's reopening
- Central banks overtighten
- Ukraine war broadens
- Mortgage shock
- European energy crisis
In 2020, economies around the world were worse than anyone had forecast. In 2021, most countries had a surprisingly rapid recovery. This reminds us that the risk of surprises is not always to the downside, and that it's possible that after a year which saw the fewest positive days for stocks in over a decade (see chart below), the balance of risks in 2023 is to the upside. Despite the poor performance year for stocks in 2022, markets seem to have already priced in some of the negative trends gathering momentum in 2023. Should those trends reverse, it may help market performance to the upside.
Stocks have had the fewest positive days over the past year in more than a decade
Source: Charles Schwab, Macrobond, MSCI as of 12/17/2022.
Positive trading days shown for the MSCI World Index. For illustrative purposes only. Past performance is no guarantee of future results.