Blackstone Quarterly Webcast | Byron Wien and Joe Zidle: The Ten Surprises of 2023

The process of crafting the Ten Surprises, now in its 38th edition, kicks off each summer with my annual Benchmark Lunch series, where we try to gauge the consensus of some of the world’s smartest investors. The Strategy group then meets regularly in the fall to begin drafting the list. Joe Zidle and Taylor Becker have been active participants in this effort for five years now. 

Last fall, as we drafted the Ten Surprises of 2022, we all agreed that the markets were headed into a tough year. The market multiple was about 20x—never a good entry point for equities; inflation was a problem; and the Federal Reserve was likely to tighten monetary policy to offset the enormous fiscal and monetary liquidity that had been injected into the United States economic system during the pandemic period. Most Wall Street strategists thought the S&P 500 would appreciate by 10% in the coming year. That is their usual position, regardless of the market performance during the previous year. We were skeptical. There were some major global events that we did not anticipate, including Russia’s invasion of Ukraine. But we did have conviction that the market was expensive and unprepared for any adversity that might confront it. 

Our definition of a Surprise is an event which the average professional investor would assign a one-third chance of taking place, but which we believe has a 50% or better chance of happening. Our goal is not simply to be contrarian, or even to get a high score (although we are gratified when we do). Instead, we aim to stretch our own thinking and that of our readers. To keep ourselves honest, in our January essay we always assess the outcome of the prior year’s Surprises.

For our first Surprise, we said the market would be volatile and make no progress during the year, ending where it started. This was significantly more pessimistic than the consensus view. Directionally, we got this one right, though it turns out we weren’t quite negative enough. We thought the market decline would approach, but not exceed, 20%, and as it turned out, the market declined by a bit more than that, nearly 25%. The multiples of many growth stocks were over 30x at the start of the year, and we thought they were vulnerable. As we anticipated, value outperformed growth by a significant margin during the year. 

The second Surprise is another example where we were directionally right, but didn’t go far enough. We said that inflation was not “transitory” and that the Consumer Price Index would rise by 4.5% in 2022—when the consensus view was that inflation would be closer to 3%. We thought that wages and rents would continue to rise, more than offsetting declines in transportation and energy prices throughout the year, and that “persistent inflation” would become the “dominant theme.” 

Because inflation proved to be persistent, we expected the bond market to react and the 10-year Treasury note to rise to 2.75%. This was the Third Surprise, and one of the most out-of-consensus. We thought the Fed would raise rates four times in 2022, which was hawkish relative to consensus at the time the Surprises went to print. Because inflation went even higher than our bullish expectations, so too did the 10-year and the federal funds rate, both of which surged past 4%. 

Surprise Four was about “return to normal.” We recognized that omicron and other COVID strains would be with us and that booster shots would be required, but we expected that conventions and other meetings, cultural institutions and sports arenas would see attendance come back to 2019 levels. The outcome of this one was rather mixed, but travel and event attendance has roared back. Live concert interest is nearing pre-COVID levels (consider that Taylor Swift sold a record 2 million concert tickets in a single day in November). Certain companies reported that business event bookings surged past pre-COVID levels, while the FIFA World Cup 2022 in Qatar recorded the highest-ever attendance in the tournament’s history. 

Also in the fourth Surprise, we thought that the return to office would accelerate. While office attendance has improved, commercial real estate experts tell us that occupancy is generally below 70% on most days in the US, with Fridays being the weakest. The big problem seems to be that many people have dropped out of the workforce. A primary reason is that many older workers took early retirement. Many others didn’t like their jobs, saved some money during the pandemic, and decided to step out for a while, hoping that something more interesting would come along. For myriad reasons, unemployment has remained low, and the ability to find and recruit qualified workers remains a challenge for many of Blackstone’s surveyed portfolio companies. Many companies seem to be retaining workers even though business has slowed because they are concerned that when business improves, they will have trouble staffing the positions they need. This is showing up in US productivity data, which has weakened recently. 

For the fifth Surprise we expected China to address problems in their property market, which had been the primary option for the population to invest excess savings and had become dangerously speculative. We thought that might give rise to an increase in China’s domestic money management activities. While we were right that the authorities would address real estate speculation, professional money management remains an opportunity for the future. What we really missed was China’s rigorous adherence to a zero-COVID policy, slowing its economy and limiting its engagement with the West.

In Surprise Six, we speculated that gold would rise 20%. Part of this was our belief that cryptocurrencies would run into serious trouble during the year, which we were right about, and the spot price of gold surged 14% in the first few months of the year. After that, gold’s performance was disappointing. As interest rates rose during the year, the cost of owning gold—which has no return—became real. The dollar also rose in value, increasing the attractiveness of holding wealth in a paper currency rather than seeking an alternative store of value. 

For the Seventh Surprise, we focused on oil. We expected the price to rise to the point where hydraulic fracturing became profitable and it did, reaching over $100 in the spring before its recent decline to $80. This was one of those Surprises that we got right for the wrong reasons. The rapid increase in oil prices was not driven by demand, but rather by the supply shock that was caused by Russia’s invasion of Ukraine. The recent decline was a result of slowing economic growth around the world. There is still a widespread effort to implement more green energy sources for electricity, and the Inflation Reduction Act and COP27 attempt to address this issue, but the macroeconomic factors played a major role in the fluctuating price of oil in 2022. 

For Surprise Eight, we looked at the possibility that nuclear energy would come back into favor. Our reasoning was that safety measures had become more effective, and the risks of nuclear power generation had been reduced substantially. France continued to produce 70% of its electricity using nuclear sources and Germany was rethinking its nuclear shutdown policy. Our view is that there are few, if any, other energy sources on the horizon that could make the same impact on reducing carbon emissions. Russia’s invasion of Ukraine significantly increased the urgency, particularly in Europe, of finding alternative sources of energy. At the same time, the war has also endangered certain nuclear sites in Ukraine, which has not helped to ease concerns about the safety of nuclear energy. The political hurdles to this shift are still formidable and little progress was made in 2022, but the opportunity is still there. The world is falling behind on its climate change objectives, increasing the need for the major polluters to take immediate action. Making payments to developing nations that are hurt by global warming does not solve the problem. The good news is that the long-term prospects of fusion technology were improved during the year by the announcement of the success of the Livermore experiment. However, it may take decades before electrical power generation by fusion technology becomes a commercial opportunity. 

For the Ninth Surprise, we believed the environmental, social and governance factors would become part of the mainstream and business philosophy, at least in the United States. This is already happening in Europe; however, it remains a highly divisive issue in the US, where it has been accepted to some extent in certain corporate and academic circles but is receiving strong pushback from a number of red states and many Republicans in Congress. 

For the Tenth Surprise we were worried that the supply of lithium, cobalt, nickel and other materials used in the production of electric vehicles would fall into critical short supply. So far this has not happened, but the lithium supply challenge received continued attention last year. As many major auto companies aim to end the sale of internal combustion engine cars over the next one or two decades, the shortage of key materials is a real possibility. Given that China is an important producer of many of these materials or controls their production, the problem could become severe if US–China relations do not improve.

Every year, we always have a few Surprises that don’t make the list of the Ten, either because we don’t think they are as good as the ones we have picked, or we cannot bring ourselves to believe they have a better than 50% of taking place during the year. 

The first “Also-Ran” was that the Food and Drug Administration approves the first gene-editing treatment, giving rise to additional research into genomic medicine. This has not happened yet, but there is general agreement that major breakthroughs are near for Alzheimer’s, cancer, heart disease and diabetes. In the second Also-Ran, we said that Jamie Dimon, a cryptocurrency non-believer, reverses his stance and allows some cryptocurrencies on the JP Morgan money management platform. There is some evidence that the bank has taken a more open attitude towards crypto, but the broad trouble across the space—including the ongoing fallout from the collapse of FTX—has reduced interest in this alternative asset. The third Also-Ran is that both China and the United States make a major effort to improve semiconductor technology, recognizing that this capability is essential to economic leadership. There we definitely saw some progress in the US, in particular, with the passage of the CHIPS and Science Act, and multiple major chip manufacturers announcing plans to build semiconductor plants in the US.

Finally, the last Also-Ran is that Puerto Rico becomes an important winter home and relocation spot, because of its favorable weather and tax advantages. Rough weather last year made that the least likely Surprise. 

Every year there always many people who contribute ideas for the Ten Surprises. Our new colleague on the Investment Strategy team, Anders Nielsen, assisted as we thought about developments in Europe and elsewhere. The Third Thursday group of former research directors, friends and colleagues were helpful this year, as always. 

Now, on to The Ten Surprises of 2023! We will discuss each of the 2023 Surprises in more detail next month in the February essay.

1. Multiple candidates on both sides of the aisle organize campaigns to secure their party’s presidential nomination. There are new headliner names on the respective tickets for 2024.


2. The Federal Reserve remains in a tug-of-war with inflation, so it puts the word “pivot” on the shelf alongside the word “transitory.” The fed funds rate moves above the Personal Consumption Expenditures price index and real interest rates turn positive, a rare phenomenon relative to the last decade


3. While the Fed is successful in dampening inflation, it over-stays its time in restrictive territory. Margins are squeezed in a mild recession.


4. Despite Fed tightening, the market reaches a bottom by mid-year and begins a recovery comparable to 2009.


5. Every significant correction in the market has in the past been accompanied by a financial “accident.” Cryptocurrencies had a major correction and that proved not to be a systemic event. This time, Modern Monetary Theory is fully discredited because deficits have proven to be inflationary.


6. The Fed remains more hawkish than other central banks, and the US dollar stays strong against major currency pairs, including the yen and euro. This creates a generational opportunity for dollar-based investors to invest in Japanese and European assets


7. China edges toward its growth objective of 5.5% and works aggressively to re-establish strong trade relationships with the West, with positive implications for real assets and commodities.


8. The US becomes not only the largest producer of oil, but also the friendliest supplier. The price of oil drops primarily as a result of a global recession, but also because of increased hydraulic fracking and greater production from the Middle East and Venezuela. The price of West Texas Intermediate crude touches $50 this year, but there’s a $100 tick out there sometime beyond 2023 as the world recovers.


9. The bombardment, destruction and casualties in Ukraine continue for the first half of 2023. In the second half, the combination of suffering and cost on both sides necessitates a ceasefire and negotiations on a territorial split begin.


10. In spite of the reluctance of advertisers to continue to support the site and the skepticism of creditors about the quality of the firm’s debt, Elon Musk gets Twitter back on the path to recovery by the end of the year