Ron Insana: History suggests the market rebounds in 2023. What could go wrong? Plenty

“What could possibly go wrong?” should be Wall Street’s thesis for 2023.

While it’s extremely rare for stock prices to fall for two successive years, there’s also nothing that suggests it can’t happen, as it did from 2000-2002, 1973-1974, from 1929-1932 and then again from 1939-1941.

My colleague, Bob Pisani, recently noted that those have been the only four occasions when stocks have fallen two or more years in a row since 1928.

But let’s look at the laundry list of risks in 2023.

First, the Federal Reserve not only plans to raise rates as many as three more times early this year by a cumulative three-quarters of a percent. Fed officials have also publicly stated that once the central bank is finished raising rates, it expects to hold them high for the remainder of the year, apparently irrespective of progress on inflation.

Higher interest rates remain a serious barrier to a new bull market in equities as history has shown us.

In addition, other central banks are following suit, raising the risk of global recession, declining corporate profits and continued dislocations in leveraged finance.

Some market strategists are suggesting that S&P 500 profits could fall as low as $200 per share in 2023. Put a 15-multiple on that and the S&P could trade as low as 3,000 before the market bottoms out.

There is also rising risk of defaults in non-investment grade, or “junk,” bonds and — from what professionals tell me — in collateralized loan obligations, which both tend to see downgrades and defaults in a recession.

That’s the type of market tumult that hurts financial institutions and raises the possibility of systemic risk, often associated with bailouts and a so-called pivot in Fed policy.

We’ve already seen, effectively, a crash in residential real estate as pending home sales, new sales, existing sales and home prices, have all declined. In some cases, the drop has been as far and as fast as at any time in recent economic history, including the real estate and credit collapse that led to the 2008 financial crisis.

As other central banks continue raising rates, like the European Central Bank, the risk of another sovereign debt crisis, a la 2011, raises its ugly head as Italy, among the most heavily indebted European nations, appears to be at the center of that rising risk.

Then there’s China. As it abandons its zero-Covid policy, it appears that the pandemic is spreading on an uncontrolled basis with as many as 350 million Chinese citizens affected with the latest strain, according to several published reports. Chinese workers appear to be loath to return to work, raising the specter that China’s reopening will be a bust.

Some economists, at Barclay’s for instance, are forecasting a contraction in China’s exports weakening the prospects for a rebound in growth, just as the rest of the world heads toward recession. That is not the stuff that a synchronized global recovery is made of.

The war in Ukraine continues with Russia now cutting off energy supplies to countries that will not pay more than a G-7 capped price for Moscow’s oil. That may only be a near-term negative as a weaker global economy, including that of China, would lead to falling demand for crude and likely more than offset reduced supplies from Russia.

When you boil it all down, 2023 could be year of the “P.”

A Fed pivot? Renewed Chinese pandemic? The end of Putin? A profit recession? Political turmoil in the U.S., China, North Korea and Iran?

All this may well point to a pair of down years for stocks.

If inflation wanes, China rebounds and the war in Ukraine ends, the second half of the year might lead to quite a pop. But the world will need to clear all those hurdles before Wall Street can “put on the Ritz” once again.

 — Ron Insana is a CNBC contributor and a senior advisor at Schroders.