Too Early To Call A Bull, But Markets Have Played Ball In 2023

Too Early To Call A Bull, But Markets Have Played Ball In 2023

February 15, 2023

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Investors should be feeling pretty good at this point. In California, the rain storms seem to have passed (for now at least), Super Bowl LVII was filled with drama and decided by a last-second field goal, and bonds, US Stocks, and Foreign Stocks seem to be rebounding from the lows of the last quarter (4Q2022).

You might find yourself feeling anxious, wondering “what next?”. You wouldn’t be alone. It seems that we are faced with a dilemma: did the market correct too far and therefore we are getting a recovery bounce that should take it to a level of normalcy? Or is the Fed going to orchestrate a soft landing that should provide a backdrop for a continuation of the market advance?

Let’s try and develop a roadmap to this question by looking at where we are currently. Looking back to 2021, taking into account the drop of 2022, and the recovery that we have been experiencing in the first six weeks of this year, this is how things look currently:

Here’s what I see:

  1. We had a Santa Claus Rally - not large, but positive nonetheless.
  2. The first five days of January were strong, up 1.4%
  3. We have seen a trifecta of market breadth measured on January 12th.
  4. The market crossed above the downtrend 200-day moving average, for the first time since the rollover began. The past couple of attempts encountered more selling to lower-lows.
  5. We have experienced the fabled “Golden Cross” where the 50-day moving average crosses above the 200-day moving average.
  6. The S&P 500 from the high point to the low point has now come back up and crossed above 50% of the decline.

So All Is Good In River City? Well, Not So Fast...

Although not widely publicized, the major money center banks have quietly tightened their lending standards. This is the clearest admission that they see a possible problem looming in real estate, specifically in commercial and industrial. This tightening can be seen as a means to protect themselves.

This is not a positive sign from the perspective of banks’ opinion on the future of economic growth and prosperity. This has not always been a good indicator of future business growth expectations, yet it is not a big surprise given that the banks’ most recent memory is the Great Financial Crisis of 07-09 where there were financial failures and enough economic pain that there have even been movies written about this period.

The next issue is inflation. This seems to be a “quiet cancer” to the economy that negatively affects almost everything. Yet, measures are showing that it is on the decline from late 2022 highs. Beginning with wage growth- not labor numbers directly:

To get a good handle on this, I implore you to watch the YouTube below. This is the link that explains the GDP, Inflation/wage data, and construction spending/hiring. It is an LPL webcast for Friday, February 10, 2023:

The next two inflation pictures to give you show the two biggest measures of inflation; the course of CPI inflation and PCE inflation. Both of these show that they seem to have topped out and are rolling over. This week gives us the next data point for the CPI. As of this writing, I don’t yet have the data needed to update further:

The logical question then becomes, “OK, so the CPI and PCE seem to be rolling over, but what do the markets do when these inflation measures have seemingly topped out?” Historically, since World War II, the S&P 500 bottoms about 7 months after inflation peaks and inflation seems to have peaked about 8 months ago. Therefore, January of 2023 would be about the right time for the markets to begin their recovery. Note below the pink box at the bottom in June of 2022 when inflation seems to have peaked, and the green box in January of 2023 when  the markets have started a recovery:

This then leaves us with the last issue: recession. Because if the inflation and the market decline of 2022 were severe enough to cause a recession, are all bets off? Last week stock markets of the world (both US and Foreign) fell for the first week this year, in part because investors are starting to believe that inflation is going to re-assert itself (after the super strong shocking labor number). There is a cadence of reports that swayed many this way. But we think investors are just overlooking the far greater story. Here are the five data points that “scared” investors:

  • January jobs report curiously strong at +577K.
  • Manheim Used Car Index rose in January.
  • University of Michigan Survey of Inflation rose to 4.2%. This is solely blamed on the bounce in gasoline prices.
  • CPI this week could show a recovery in housing.
  • January CPI could come in hotter than the rest of the deflationary components have shown.

So we wait to see what housing, gasoline prices, and other labor components show. If the economy is slowing, the buzz should move from the fear of unbridled inflation to that of recession vs. a soft landing on the economy. This is coupled with February historically being a tough month. Only about half the time is February a normally positive return month. So I will leave you with the latest statistical measure by Thomas Lee’s Fundstrat team in their comment of Monday morning of this week.

Again, going back to 1950, the years with returns of over 5% for the year after the first week of February (last week was this first week of February) the returns have been quite impressive every year except the market crash year of 1987:

I’m not saying that everything is rosy and that 4,800 is the proper target for 2023, but the year is surely starting quite strong and a positive recovery following 2022 would not be completely unexpected- particularly given the statistical data we have from history. Looking at a picture of what we are currently experiencing, this is how we are looking. Let’s hope that things truly are on the mend and the markets do become a much better place for 2023:

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