Traders Increasing Bearish On 2023

Six out of ten retail traders expect a recession in 2023 according to a survey conducted by online trading platform and CFD broker Capital.com.

The recession could last years

The broker recently quizzed more than 4000 of its clients on a variety of market-related topics.

When asked how severe they expected any recession to be, 40% of respondents said that it would be a multi-year downturn, whilst 47% forecasted a mild short-lived recession.

A sizeable minority, numbering 25% of the clients questioned, didn’t expect a recession at all in 2023, and another 12% were undecided.

An increasing appetite for short sales

Capital.com also asked the survey participants about their likely positioning and allocation plans for this year.

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31.0% said they would not be changing their strategy over the next 6 to 12 months, whilst 23% said they would look to take on more short positions.

Capital.com Published an analysis in July 2022 that showed that short positions had been 32.0% more profitable than long-only trades undertaken with the firm.

And, that 38% of the spread betting broker’s active traders had made short trades during Q2 2022.

FX, energies and equity indices were the most popular and fruitful instruments, and short traders hailed from the UK, Africa and Asia. While Australian clients were the least likely to trade on the short side.

Traders remain cautious

A sizable cohort of clients was more cautious, however, with 21% saying that they would move more into cash and longer-term investments, 16% of clients said that they would be increasing their exposure to gold.

It’s not just gold that interests the traders, 70% of the UK traders questioned said that commodities, in general, would perform well this year, with gold thought likely to be the biggest gainer.

Elsewhere 16% thought that UK stocks would continue their strong showing in 2023, the FTSE 100 was the best-performing major equity index, in 2022.

Speaking about the survey results, Daniela Hathorn, Market Analyst at Capital.com, said:

“It’s interesting to note how more traders are looking at shorting strategies as markets turn more uncertain. Contracts for Difference (CFD) trading enables traders to take a short position in many markets, meaning they are able to position themselves accordingly even when their views are more pessimistic or they believe an asset is overpriced”

What I think will matter to traders in 2023

Investors and traders face one of the most challenging environments we have seen in modern times. Rising interest rates and inflation meant technology and growth stocks dramatically underperformed and dragged equity Indices lower as result.

A strong dollar was the dominant force for much of 2022, leaving most other currencies trailing in its wake. And despite a recent pullback, the dollar index is still up by 7.76% year over year.

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My own thoughts are that there are two questions that traders need to consider about the year ahead.

Firstly when and if the Federal Reserve (and other central banks) will slow the pace of interest rate rises, in the face of contradictory economic data?

For now, the bulls are in charge and are looking for a change, or pivot from the Fed, before the end of the year.  That despite comments from various Fed governors, and the recent FOMC minutes, stating that this isn’t on the cards.

Question two revolves around the reopening of the world’s second-largest economy China, how quickly and efficiently this can take place, and whether the potential for millions of additional covid cases will hamper the process.

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Added to this there is the issue of how much additional demand the reopening will create, and what that will mean for commodity prices, particularly oil and gas, which have been a source of inflationary pressure in both the developed and developing economies.

Q4 2022 earnings season begins later this week and how optimistic or otherwise, companies are about trading in Q1 2023, and beyond, will probably be more important than earnings and revenue data, from the last quarter, and this guidance could well set the tone for the market over the next couple of months.