In January, he said even the downbeat Wall Street consensus was too sanguine and predicted the S&P could drop more than 20% before finally snapping back. A month later, he warned clients the market’s risk-reward dynamic “is as poor as it’s been at any time during this bear market.” And in May, with the S&P up nearly 10% on the year, he urged investors not to be duped: “This is what bear markets do: they’re designed to fool you, confuse you, make you do things you don’t want to do.”

Wilson declined requests to be interviewed for this story.

Similar resolve had taken hold among bond mavens. Yields on Treasuries surged in 2022 as the Fed put an end to its near-zero interest-rate policy, pushing up the cost of consumer and business loans. It was all happening so fast, the thinking went, that something was bound to break in the economy, driving it into recession. And when it did, bonds would rally as investors rushed into haven assets and the Fed came to the rescue by reopening the monetary spigot.

So Swiber and her colleagues on BofA’s rate-strategy team—like the vast majority of forecasters—predicted solid gains for bond investors who had just been dealt their worst annual loss in decades. The bank was among a handful of firms calling for the yield on the benchmark 10-year note to drop all the way to 3.25% by the end of 2023.

For a moment, it looked like that was about to happen. Something indeed broke: Silicon Valley Bank and a few other lenders collapsed in March after suffering massive losses on fixed-income investments—a consequence of the Fed’s rate hikes—and investors braced for an escalating crisis that would throttle the economy. Stocks swooned and Treasuries rallied, driving the 10-year yield down to BofA’s target. “The thought was that this would be a tailwind to this view for a harder landing,” Swiber said.

But the panic didn’t last long. The Fed managed to quickly contain the crisis, and yields resumed their steady climb through the summer and early fall as economic growth re-accelerated. A late-year rebound in Treasuries pushed the yield on the 10-year note back down to 3.8%, just about the same level it was at a year ago.

Swiber said the year has been humbling, not just for her but “for forecasters across the board.”

At the same time, Wall Street was being handed another humbling in markets overseas.

Chinese stocks gained during the last two months of 2022 as the government ended its strict Covid controls. With its economy unleashed, strategists at Goldman, JPMorgan and elsewhere were predicting China would help propel a rebound in emerging-market stocks.

Goldman’s Trivedi, the head of global currency, rates and emerging-markets strategy in London, concedes things haven’t gone as expected. The world’s second biggest economy has faltered as a real-estate crisis deepened and fears of deflation grew. And rather than pile in, investors pulled out, sending Chinese stocks tumbling and dragging down returns on emerging-market indexes.

A stalled housing construction project in Zunyi, Guizhou province, China, on June 15, 2023. Photographer: Qilai Shen/Bloomberg
“The boost from reopening faded very quickly,” Trivedi said. “The net positive effect from reopening was smaller and you did not see the same kind of growth rebound that you had in other parts of the world.”

Meanwhile, the US equity market continued to defy naysayers.

By July, Morgan Stanley’s Wilson acknowledged he’d remained pessimistic for too long, saying “we were wrong” in failing to see that stock valuations would climb as inflation receded and companies cut costs. Even so, he was still pessimistic about corporate earnings, and later said a fourth-quarter stock rally was unlikely.

When the Fed held rates steady for a second straight meeting on Nov. 1, however, it set off a furious rally in both stocks and bonds. The advances accelerated this month after policymakers indicated that they’re finally done hiking, prompting traders to anticipate several rate cuts next year.

Markets have repeatedly erred in expecting such a sharp pivot in the past couple years, and they could be doing so again.

For some on Wall Street’s sell-side, doubts are creeping in. At TD Securities, Gennadiy Goldberg, now the head of US rates strategy, said he and his colleagues “did some soul searching” as the year wound down. TD was among the firms predicting solid 2023 bond gains. “It’s important to learn from what you got wrong.”

What did he learn? That the economy is far stronger and far better positioned to cope with higher interest rates than he had thought.

And yet, he remains convinced that a recession looms. It will hit in 2024, he says, and when it does, bonds will rally.

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