What direction will the market take for the rest of 2023?

The market right now appears to be in a precarious space. Having seen recent surveys on CNBC asking viewers the question, it appears that people are equally split between bulls and bears for the rest of 2023. Something that is important to understand is that the direction of the stock market is decided by the bond market, and yields on the 10-year US Treasury have been climbing since early 2021. Interestingly, prior to the crash in 1987, yields had been rising all year. Yields on the 2-year Treasury recently hit 5.03% And the simple way of understanding why this effects stocks is to ask the question; why would someone buy a risky stock when they can buy a no-risk Treasury bond with a 5% yield? And for a lot of people they choose the no-risk Treasury bonds.

Something Jim Cramer often says, is that it doesn't matter where a stock has been, it matters where it is going. And this is true for the market in general. What will likely weigh on the inflation picture for the coming year is the price of oil. Because when the oil price is high, everything else tends to be high, from your groceries to your microwave. Another thing to watch is the direction of inflation, which is obviously driven in part by the oil price. The last reading showed that core CPI inflation in the US is 4.3% This is below the inflation rate around the world, which is 7.4% In the UK it is 6.8%, Germany 6.1% and China 0.1%. China's example shows how dangerously close to deflation they are. Recently Moody's downgraded China's GDP growth rate from 4.5% to 4%. Remember that during a large portion of the first 20 years of the 21st century China's GDP growth was over 10%. Now with that growth seriously slowing pressure is going to weigh on everything from commodity prices to consumer goods for the foreseeable future.

There is no doubt that the worlds stock markets are in a precarious place right now. For the rest of 2023 markets may tread sideways with many traders waiting to see how these many risks play out. 2024 is the more interesting year, and I think the chance for a big bear market in 2024 are far greater than a bull market. But what to do if that is the case? Wait it out, or use the rest of the year to build up our cash position? I think what I will be doing is the latter. I think we will see a down year next year, and towards the back end of the year it would be good to have some cash on the sidelines.