If there's anything that 2022 has taught us as investors, it's that we always need to be aware of the risk factors in the broader macro environment, and also think about how they might impact individual stocks in our portfolio.

While I don't know what will happen in 2023, I do know there are a lot of risks that could exacerbate the pain the market has experienced this year.

There's a real possibility that they don't materialize and the market rebounds, as the market rarely falls two years in a row. Still, it's best to prepare for the worst. Here are three big risk factors in 2023 and how they could impact the market.

1. Interest rates

One event the entire market will be watching in 2023 is the trajectory of interest rates. After rapidly raising its benchmark overnight lending rate, the federal funds rate, in 2022, the Federal Reserve has indicated that there are likely a few more rate hikes to come in 2023, and that the federal funds rate will top out at about 5.1%.

Person looking at computer.

Image source: Getty Images.

But if the labor market doesn't deteriorate further and inflation doesn't keep cooling, the Fed may need to raise rates more than anticipated, or keep them higher for longer. Now, I don't expect this to happen -- I would expect inflation to continue to slow. But it's been very tough to predict, and could still catch the market by surprise.

For instance, if mortgage rates stay high it could force more and more people to leave the housing market and enter the rental market, driving up rent prices, which are already sky-high. This is a big expense in a consumer's life and could keep inflation persistent on its own. Oil prices might also shoot back up, adding to inflationary pressure.

2. Surging oil prices

Speaking of oil prices, they shot up in 2022 and at one point surpassed $130 per barrel before coming back down to below $80 per barrel now. The main culprit was Russia's invasion of Ukraine, which led the U.S. and many European countries to ban oil imports from Russia. The Organization of the Petroleum Exporting Countries (OPEC) has also been curbing the supply of oil.

But it's quite possible that oil prices rebound and shoot past highs seen in 2022, according to Harris Kupperman, the president of the hedge fund Praetorian Capital. In a blog post, Kupperman recently said "that 2023 is the year of oil crushing all other" assets. Kupperman attributes his belief to minimal recent spending on oil exploration, growing global oil demand, and the fact that he thinks Russian oil is in "free-fall." Kupperman indicated that he thinks $200 or more per barrel of oil could materialize.

Now, Kupperman made a similar call like this in 2021, and while he didn't get his exact price right he was right about the price of oil taking off. High oil prices could lead to persistent or even higher inflation, leading the Fed to rethink its trajectory of interest rate hikes.

3. Quantitative tightening and the unknown

Another big risk is the Fed's continued quantitative tightening (QT) program, in which the Fed lets U.S. Treasury bills and mortgage-backed securities (MBS) roll off its balance sheet once they mature. This effectively removes liquidity from the economy. The Fed is now allowing $95 billion of bonds to roll off its balance sheet every month. The Fed made this decision after it pumped extreme amounts of liquidity into the economy during the pandemic, which led to its balance sheet ballooning to close to $9 trillion in assets.

While pumping money into the market often helps stocks because there is more money to deploy, the effects of pulling it out are still rather unknown. For instance, the Fed might over-tighten and pull too much liquidity out of the system. This occurred in 2019 and led interest rates in the overnight repo market to spike to extreme levels, forcing the Fed to intervene.

Another question is how QT will impact bond yields. Ideally it should increase them, because with the Fed no longer buying an unlimited amount of Treasury bills and MBS, that should increase supply, leading to lower bond values and higher bond yields because the two have an inverse relationship. However, bond yields fell between 2017 and 2019 when the Fed did its last bout of QT. 

Now, the Fed has more experience with QT, but we're still largely in unchartered waters. There is the possibility that QT does not go as planned and disrupts markets.