Stock Market Predictions for 2023

It is that time of the year when predictions for the next year (2023) are starting to come in for almost every field. So we feel responsible for making our predictions as well.  

The market environment in 2022 was challenging for traders and investors, with the general market seeing large drawdowns and uncertainty caused by the global economic climate. All the major indices of the US market have been down anywhere 20-32% between  YTD (as of Dec 19, 2022).  Retail traders lost an estimated $350 billion this year with an average retail portfolio having a 30% drawdown.

2022 YTD Performance of S&P 500 and Nasdaq 100


Quantitative and systematic hedge funds, on the other hand, managed to remain profitable during these turbulent times due to their ability to adjust their strategies to changing market conditions quickly. Consequently, they outperformed discretionary counterparts who relied on human analysis and subjectivity. In this way, quantitative trading proved the most reliable approach in bearish or range-bound markets, showing that data-driven investment can be essential in such challenging conditions.

2022 YTD Performance of Systematic and Quantitative Hedge Funds


While a bull market generally allows most trading approaches to thrive, bearish or ranging markets are the ultimate test of a strategy's quality. The uncertainty and drawdowns caused by these conditions can present severe obstacles to the profitability of traders, and many risk-averse investors flee the market altogether. 

Discretionary trading becomes more challenging because the emotional tax increases tremendously during uncertain markets. It takes decades of experience across multiple recessive market environments to build the mental resilience to stay disciplined and focused. Most traders don't have that kind of experience, especially the ones who have started trading in the past decade of the fantastic bull run. In fact, for new traders, starting with discretionary trading can be a big mistake.

Quantitative and systematic traders tend to prevail in any market environment, including bear, sideways, or uncertain market environments, because their trading strategies are based on rules and data rather than the subjective opinions and emotions of the trader. These strategies can be designed to adapt to different market conditions and are often based on statistical analysis and risk management techniques, which can help to mitigate potential losses and maximize returns. In a way systematic trading can be like mindful meditation to navigate the chaos of the market.

In a bear market, for example, a quantitative trader might use a strategy that involves short selling or selling options or buying inverse ETFs to profit from a decline in asset prices. A quantitative trader might use a range-bound strategy in a sideways market that involves buying and selling within a specific price range. And in an uncertain market, a quantitative trader might use a strategy that involves hedging or strategy diversification across asset classes to protect against potential losses.

So what's our prediction for the market for 2023?

It is difficult to predict what lies ahead in the market for 2023. As systematic traders, our job is not to predict but to systematically manage risk and switch strategies to fit the market regime as and when it changes. Our apologies if you expected us to provide "guru predictions" for the market in 2023.

Let us first dispel that myth: NO ONE can predict what the market will do in 2023. But it is sure to do one of two things - end 2023 up from where it is now or end 2023 further down. So it is the perfect stock market cliche of a 50% chance of any of these predictions being correct, after the fact! And so you will find different "market gurus" making predictions in either direction [Examples here or here]. 

As traders or investors, you can be LONG, SHORT, or both at any time in the market. But what will matter is whether you have a strong belief in your hypothesis, have tested it across similar market regimes, and then have a definitive strategy to manage your positions as the market unravels itself and position-sizing it correctly. 

The volatility in the markets we have seen in 2022 is likely to continue into 2023, as the Feds continue to increase the interest rates to get inflation back into the 2% box, which could turn the fears of recession into a reality. But always remember nothing is a certainty, and everything is a probability. 

So if we have to really predict for 2023, the systematic approach will continue to thrive next year, too, and for all years to come, consistently, but the discretionary approach will continue to have periods of performance and non-performance depending on the market regime. 

While the term "smart money" is a misnomer when used to define all institutions with large AUMs (assets under management), it is appropriate when used in the context of institutions that use a systematic and quantitative approach and not a discretionary one. It is unfortunate that retail trading is referred to as "dumb money." But maybe discretionary trading is that for most retail traders, especially beginners.

Isn't it high time that retail traders also turn themselves into "smart money" in 2023 by starting to trade in a systematic way?

And all that it takes is to move to simplicity on the other side of complexity.

While systematic trading is hard for most traders, everything else is just harder. Our Co-Founder & CEO, Ruban Phukan, has written a best-seller on Amazon on this topic. One of the reasons why systematic trading is hard is that most traders are not coders and most systematic trading platforms currently available in the market are coding-based. This will change in 2023!

We are launching the ultimate no-code systematic trading platform that makes it easy for anyone to build trading systems irrespective of their coding or trading experience. We had recently done an internal hackathon (more like a trade-athon) where our team members, who had never done trading before, could create trading systems that performed phenomenally well in the backtests for 2022, all by using the UI of our app.  

This will help create an even playing field for retail traders, especially beginners, to trade like the systematic hedge funds in 2023.

This is our firm belief and mission, not just our stock market prediction for 2023! 

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