Ten Surprises of 2023: Year End Review

By Joe Zidle December 20, 2023

In October, we lost Byron Wien, a remarkable figure who actively contributed to Blackstone’s investment strategy until his passing. Byron’s commitment to his craft along with his geniality and grace earned him an influence that extended far and wide, something that was on full display at his memorial at the New York Historical Society.

Traditionally at this time of year, we would review the current year’s Ten Surprises while we put the finishing touches on the next edition. This annual publication, known for its unique and sometimes irreverent ideas, stood apart in a world filled with predictable year-ahead analyses. It also reflected Byron’s distinct personality throughout his 38 years of authorship.

Deciding the future of the Ten Surprises has been challenging. After consulting numerous friends and colleagues across the industry, the answer became clear, inspired by one of Byron’s life lessons: “Don’t try to be better. Be different.”

In this spirit, below we review the Ten Surprises of 2023, and then we reminisce over some of the most memorable Surprises from previous years. In January, the team and I will introduce a new publication that highlights major themes that we believe are likely to influence investment decisions in 2024.

In our hearts, we know Byron is crafting his next set of Ten Surprises. Byron, you are deeply missed.

In the summer of 2022, the Federal Reserve was aggressively raising interest rates with a series of 75- basis-point rate hikes, stocks were deeply in the red for the year, and the 10-year Treasury bond was headed for its worst performance since 1787. The yield curve, traditionally the most accurate predictor of economic cycles, signaled recession, and analysts were dialing back corporate profit estimates as companies reported disappointing earnings. All the while inflation raged. A recession was imminent according to the consensus, with the only question being how deep.

As always, the process of crafting the Ten Surprises of 2023 kicked off at our annual Benchmark Lunch series. In gauging the consensus of the attendees, it was not hard to determine that the mood was decidedly sour. When we began drafting the Surprises in the fall, Byron and I were concerned about the economy but more upbeat on the markets, a baseline that we took into 2023’s Surprises.

Our definition of a Surprise is an event that 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. The goal is not simply to be contrarian, or even to get a high score. Instead, we aim to stretch our own thinking and that of our readers.

The First Surprise addressed which candidates would secure their party nominations. We expected voters to reject both the incumbent and former president, favoring new candidates. Although unresolved, it’s still too early to call this one as both look to be leading contenders at this point.

Our Second Surprise said that the Fed would maintain higher interest rates for an extended period, achieving a real positive rate, a post-Global Financial Crisis rarity. We anticipated a shelving of the term “pivot,” an out-of-consensus view. When we went to print in January, the real rates were still deeply negative and the market anticipated the first interest rate cuts in June. This Surprise certainly went in our direction.

We erred in our Third Surprise, expecting a mild recession due to prolonged restrictive monetary policy. Instead, 2023 showcased economic resilience despite higher rates.

We were more constructive on the market than the economy in our Fourth Surprise, thinking that it would bottom by mid-year and begin a recovery that rivaled 2009’s. Since March’s low of 3,855, the S&P 500 has risen nearly 20%. Despite my growing skepticism about valuations, I must acknowledge these results.

The Fifth Surprise focused on the possibility of a financial “accident” as an unintended consequence of coordinated and aggressive central bank tightening. While we didn’t foresee the regional bank crisis in March, we suspected a crisis would unfold as excess liquidity was removed from the system.

Our Sixth Surprise was a stronger dollar presenting a generational buying opportunity in European and Japanese assets. As the economic problems around the world today are more similar than different, we looked at the massive currency adjustment and believed that some of the best values in the world were in non-US assets of major developed countries. It is a little too early to judge, but we feel good about this Surprise playing out favorably, with European and Japanese markets performing well in US dollar terms in 2023.

In the Seventh Surprise, we expected China to miss its 5.5% growth target while aggressively rebuilding relations with the West. The recent Asia-Pacific Advancement Conference in San Francisco included US-China commitments to reopen military lines of communication, increase flights early next year, and expand exchanges in education, international students, youth, culture, sports, and business. We thought this would be positive for real assets and commodities, but performance here was challenged.

We were bullish on oil in the Eighth Surprise. We thought that the US would strengthen its position as the world’s largest oil and gas producer and that West Texas Intermediate (WTI) could touch $50 per barrel before eventually rallying to $100 a barrel as the global economy recovered. Partial credit is deserved here: While oil traded between $65 and $95 a barrel, the US extracted a record 12.9 million barrels per day in 2023. The Biden administration passed important initiatives in the renewable energy space while also permitting at least 17 large fossil fuel projects,¹ which will lock in oil production growth for years.

The Ninth Surprise anticipated Ukraine and Russia discussing a territorial split due to increasingly unbearable war tolls. Unfortunately, the war does not seem to be any closer to an end despite the cost to both sides.

Byron and I would often tell people that we don’t take ourselves too seriously with the Ten Surprises and, with a wink and a nod, that others shouldn’t either. For that reason, we always included a Surprise that was a little offbeat. Our Tenth Surprise focused on Elon Musk’s acquisition of X (formerly Twitter). We predicted a turnaround by year’s end, a bet we may have lost, even though, personally, I wouldn’t bet against Musk.

Every year we have several Also-Rans that for one reason or another don’t make it into the top Ten. In 2023, we thought cryogenics would take off as funeral homes around the country advertised “It’s Nice to Be On Ice.” We also thought there would be a breakthrough on carbon emissions of coal-fired plant that took the edge off climate change. Finally, we said that India would compete seriously to win manufacturing from China.

Now, let’s move on to something that the team and I thoroughly enjoyed researching. In remembrance of Byron, we revisited all 478 Surprises and Also-Rans from 1986 to the present to compile our personal top Ten. It was a memorable journey through Byron’s thinking in up markets, down markets, and everything in between. We made our selections based on a variety of factors, ranging from those that differed significantly from the consensus to those that we believed exemplified Byron’s unique style.

We hope you enjoy this look back as much as we did. If you have any favorites that come to mind, we would greatly appreciate it if you could share them with us.

We wish you all the best this holiday season, and we look forward to bringing you more insights in the new year.

Joe

A special thanks to Anav Bagla and Kristin Roesch for their assistance in the research for and writing of this essay.

Our Top Ten “Ten Surprises” of All Time

1. 1986; Surprise #1: The long bond goes to 8%.
   
   Our journey through Byron’s surprises begins where it all started. In Byron’s first-ever Surprise, he accurately forecast the long bond yield’s descent to 8%. After an initial spike to 9.6% at the start of the year, the 30-year Treasury’s fall to 7.1% was a move that caught the market by surprise. As Byron himself remarked, “No one anticipated the drop in long bond yields to 7.1% at the beginning of 1986.” He labelled this Surprise “the most important” one of 1986 due to the profound impact the unexpected decline in rates had on markets.
2. 1999; Surprise #10: The Year 2000 meltdown turns out to be hoax. There are few earnings hits, every plane flies, and automatic teller machines deliver cash on New Year’s Day in the new millennium.
   
   As 1999 kicked off, the world braced for Y2K chaos. The anxiety was palpable as investors grew concerned about potential market dislocations from malfunctioning computer programs, a sentiment captured by the January 1999 cover of Time magazine: “The end of the world!?! Y2K Insanity!” Byron, however, showcased his ability to stay rational amid fear and speculation. He cut through the era’s tech-panic and accurately forecast that Y2K would be a mere “non-event.”
3. 2000; Surprise #4: The Internet finally meets its Waterloo. A movement gains support in Congress to charge a national sales tax on Internet transactions, which would be allocated to the states. Online users complain about slow speeds and the disappointing performance of some companies. Delivery bottlenecks from e-tailers trigger buyer resistance. There is a graduated carnage in technology. Some Internet content and retailing stocks correct 50%, and access providers come down by a third. Personal computer and other hardware companies with current earnings decline only 25%. The Internet continues to be viewed as the most powerful business phenomenon in our lifetime, but the stocks were discounting a profitability reality that was unlikely to come true.
   
   Byron’s Fourth Surprise in 2000 was almost prophetic, foreseeing a dramatic market downturn just as the Dot-Com bubble was about to burst in March 2000. In 1999, the tech-heavy NASDAQ Composite Index had surged by 86%, its best year on record. The ensuing internet stock meltdown led to the index plummeting by 51% from its then-record high in March 2000 to the end of that year.
4. 2001; Surprise #7: Value outperforms growth in the US, and small- and medium-capitalization issues beat large caps. Old-economy stocks do better than new, but at least two household names in American industry agree to mergers to avoid Chapter 11 filings.
   
   Byron’s prescience was on full display as he forecast two “household names” facing the prospect of filing for Chapter 11. His foresight proved to be accurate, as Polaroid and Enron filed for bankruptcy by the end of the year. As Byron noted, “At the beginning of a new year (as now), investors seem to gravitate to growth stocks whenever these issues build up a bit of price momentum, but I expected whatever positive performance investors would gather during 2001 to come mostly from value, and it did.” In the subsequent 16 years, utility stocks significantly outperformed the NASDAQ by over 3,800 basis points, highlighting the sustained robustness of some old-economy stocks.²
5. 2008; Surprise #10: Barack Obama becomes the 44th President in a landslide victory over Mitt Romney. With conditions in Iraq improving, the weak economy becomes the determining issue in voters’ minds. They want to make sure that gridlock ends and Congress gets something done for a change. The Democrats end up with 60 Senate seats and a clear majority in the House of Representatives.
   
   Byron held this 2008 surprise in high regard, considering it the “biggest hit” among all his surprises. When Byron made this forecast, Obama trailed Hillary Clinton by 15 points in the primary polls. Despite this deficit, Byron not only foresaw Obama clinching the 44th presidential election but also anticipated a landslide victory. True to his forecast, Obama triumphantly secured the presidency with double the electoral votes of his opponent, John McCain, and a notable lead in the popular vote at 53% to 46%.
6. 2009; Surprise #1: The Standard & Poor’s 500 rises to 1200. In anticipation of a second-half recovery in the US economy, the market improves from a base of investor despondency and hedge fund and mutual fund withdrawals. The mantra changes from “fortunes have been lost” to “fortunes can still be made.” Higher-quality corporate bonds, leveraged loans, and mortgages lead the way.
   
   In 2009, Byron had his most successful year, getting some part of eight or nine surprises correct. In the aftermath of the Global Financial Crisis that had sent the S&P 500 tumbling 39% in 2008, Bryon forecast a turnaround. The S&P 500 started the year at 903 as the sharp market declines of October and November 2008 had left investors in a despondent mood. Byron believed the US economy would recover from its recession during the second half of 2009, and his foresight paid off. The S&P 500 surged 23% that year, closing at 1,115 points.
7. 2012; Surprise #1: The extraction of oil and gas from shale and rock begins to be a game changer. The price of oil drifts back to $85 a barrel and the United States becomes less dependent on Middle East supply. Deposits in Poland, Ukraine, and elsewhere prove promising as well. Increased production from Libya and Iraq and reduced demand resulting from the slowdown in worldwide economic activity contribute to the price decline.
   
   Byron accurately forecast the oil price decline driven by the increasing share of shale production and reduced reliance on oil from the Middle East. US crude oil production grew by 15% in 2012, significantly outpacing Russia (1.3%) and Saudi Arabia (-1.3%).³ Following a brief spike in early 2012, oil prices retreated to around $85 per barrel and even reached a low of $78 on June 28. As Byron noted, shale oil extraction was truly a “game changer,” marking the beginning of a shift in global oil dynamics. The US boosted oil production by 68% from 2012 to 2018, overtaking Russia and Saudi Arabia to become the world’s largest producer of oil.
8. 2014; Surprise #3: The strength of the US economy relative to Europe and Japan allows the dollar to strengthen. It trades below $1.25 against the euro and buys 120 yen.
   
   This surprise turned out to be so out of consensus that few could envision it becoming a reality. In Byron’s own words, “Most people thought I was delusional, and I was worried about this one. You know when you’re young and you’re wrong, you’re just wrong, but when you are older and you’re really wrong, people think you’ve ‘lost it.’ That’s what concerned me, but this turned out to be my best call of the year.” Byron believed that the robust US economy, compared to weaker conditions in other developed countries, would enable the dollar to strengthen. His projection proved accurate as the dollar ended the year at 1.21 against the euro and at 120 against the yen.
9. 2018; Surprise #3: The dollar finally comes to life. Real growth exceeds 3% in the United States, which, coupled with the implementation of some components of the Trump pro-business agenda, renews investor interest in owning dollar-denominated assets, and the euro drops to 1.10 and the yen to 120 against the dollar. Repatriation of foreign profits held abroad by US companies helps.
   
   In 2017, the US dollar experienced its worst year in over a decade. The US Dollar Index fell 10%, and its decline over six consecutive months marked the longest sustained fall in 14 years. The depreciation was ostensibly due to stronger economic growth in Europe, an appreciating euro, and concern over US economic growth. Byron, however, expected the dollar to rebound in 2018 alongside an acceleration in US economic growth. His rationale was that US Treasury interest rates exceeded those of other major industrialized nations and that the US economy demonstrated strong underlying growth while consistently meeting its financial obligations. By year-end, the US Dollar Index had increased by 4.3% and real GDP grew 3% year-over-year, in line with Byron’s forecast.
10. 2022; Surprise #8: Suddenly, the nuclear alternative for power generation enters the arena. Enough safety measures have been developed to reduce fears about its dangers, and the viability of nuclear power is widely acknowledged. A major nuclear site is approved for development in the Midwest of the United States. Fusion technology emerges as a possible future source of energy.
    
    Our final surprise explored the resurgence of nuclear energy as a viable power generation option. Since its publication in 2022, considerable progress has been made to advance adoption of nuclear power as a future source of energy. Additionally, at the recent COP28 climate summit, France successfully garnered commitments from 22 countries, including the US, Canada, the UK, and Japan, to triple their nuclear capacity by 2050. As Byron aptly noted, “The world is falling behind on its climate change objectives, increasing the need for the major polluters to take immediate action.”

1. Center for Biological Diversity, as of 11/27/2023.
2. Difference in total return between the Dow Jones Utilities Index and NASDAQ Composite Index between 12/29/2000 and 12/31/2016.
3. Energy Information Administration (https://www.eia.gov/energyexplained/oil-and-petroleum-products/where-our-oil-comes-from.php).

The views expressed in this commentary are the personal views of Joe Zidle and do not necessarily reflect the views of Blackstone Inc. (together with its affiliates, “Blackstone”). The views expressed reflect the current views of Joe Zidle as of the date hereof, and neither Joe Zidle nor Blackstone undertake any responsibility to advise you of any changes in the views expressed herein.

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