Every year brings out several predictions about how various assets will perform. Depending on conditions, institutions may gravitate toward a similar view. These overall consensus estimates are only useful to gauge sentiment. That’s because the final results are often wrong.

Following last year’s market selloff, however, analysts have the most mixed view of how stocks will perform in decades. Some see a recovery higher by year-end. Others see the market flatlining. And a few analysts see a further drop ahead.

Morgan Stanley (MS) sees the potential for stocks to drop another 23 percent this year. That indicates that we’re only about halfway through a bear market.

That view is based on the fact that the Fed is committed to fighting inflation. That means interest rates will trend higher for longer. And it’s based on the view that a mild recession is likely in 2023. If that’s the case, stocks likely won’t start to rally anytime soon.

While there is some good news out there, like declining inflation, it may not be enough. That’s because corporate profitability has dropped. With lower profit margins and growth come lower prices in the stock market.

The consensus view is that the first half of the year will be challenging for markets. That’s likely true. But the second half of the year may not see a steep recovery, and investors should be prepared.

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The Federal Reserve’s moves in 2022 led to the sharpest increase in interest rates in over 40 years. That speed may have surprised many investors. It also led to a big reset in valuations in both stocks and bonds. Those assets had their worst combined year since the 1930s.

The biggest hit in the bond market came from long-duration bonds. Shorter-duration notes weren’t as impacted. However, the big shift higher in interest rates led to massive losses for longer-dated issues.

This could be viewed as a duration crisis. Investors who hold long-term bonds to maturity will be fine over time. But those who overpaid when interest rates are low are suffering.

We could see that trend further play out this year with a credit crisis. Due to the rapid changes in interest rates and asset valuations, lending conditions are tightening. If things get too tight, we could be in for a credit crisis.

The last such crisis was part of the 2008 meltdown. Companies were unable to get short-term financing. And lending for housing evaporated as prices in that market came down heavily.

This could be a worst-case scenario for markets this year. While it’s a remote possibility, there are some cracks in the system. That could indicate further trouble in the months ahead, so investors should stay cautious right now.

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While a new year may be a time for change, that change only occurs if people are willing to change. The stock market isn’t likely to change, at least because the calendar flipped to a new year. The current trend in place is likely to continue.

However, there are some key ideas related to investing, especially for those who measure their investment returns. Rather than looking at a calendar year, it may be more helpful to think about rolling 12-month periods.

Another concept that can be important with a changing year is to look at the concept of mean reversion. The market had a down year in 2022. But compared to the jump higher in 2021, that looks a bit like reversion to the mean.

Plus, markets have outperformed their long-term averages in the 2010-2021 period. So it’s possible that future returns could be lower, even if the market still rises most years.

That case could be highlighted with tech stocks, which led the market higher in the last decade. Those stocks saw comparatively worse performance in 2022.

Interestingly, the past few bear markets have seen a bottom occur in March. So those looking for the current pain in stocks to come to an end may only have a few more months if this trend holds.

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A new year tends to bring new predictions, particularly for the stock market and how individual asset classes will perform. Some are bullish, many are bearish in line with last year’s market performance.

A few predictions can get to the extreme. By looking at the reasoning and data behind extreme predictions, we can get a gauge as to the level of danger or opportunity. More importantly, looking at extreme predictions can help investors avoid worst-case scenarios.

Right now, investors Michael Burry sees the market as in an “everything bubble” that is now collapsing. That could mean markets are still overvalued. And that equity markets could still fall by another 50 percent.

The reason? Rising interest rates continue to slow the economy. Consumer spending showed a slowdown over the holiday season. And consumer savings, which spiked higher during the pandemic, now face a drawdown.

A slowdown can also be seen in Europe, which is dealing with significantly higher energy and utility prices. And China is slowing down as well, even as its official GDP data still shows mid-single-digit growth.

The issue likely won’t be resolved. Burry sees inflation coming down, but a recession causing a rapid change in interest rates lower and the addition of more government stimulus. As that happens, inflation will spike again, potentially leading to another spike higher. The trend could continue for years.

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