Next week is Groundhog Day, not to mention the 30th anniversary of Groundhog Day’s theatrical release. Still, investors are betting that he will wake up Thursday from the “doom loop” that has trapped them for a year. The pattern is for all market gains to wane in the shadow of the Federal Reserve’s determination to curb risk appetite and constrain the economy. The S&P 500’s 16% rise since October’s bear market peaked in mid-August just before Fed Chairman Jerome Powell amplified his hawkish rhetoric and promised service “pain” It’s the strongest since the 18% rise. Fight against inflation. The ensuing market pullback culminated in his October low, which saw him drop more than 25% from the S&P’s all-time high. This symmetry may suggest a “go-again” wariness ahead of his Fed policy decision on Wednesday, but there has been enough change, almost all for the better. , is beginning to cast doubt on the rise. Inflation is clearly receding, Q4 GDP remains weak but strong, and Fed officials are doing nothing to defy market expectations that interest rates will rise by a quarter of a percentage point next week. did not. Positive Signposts And in terms of reading the tapes, the rhythm and pace of risk re-acceptance in early 2023 is gaining some respect, with various indicators that money is moving deliberately and urgently. I have. A broad rising and falling line marks a new cycle high. Cyclic sectors dominate, with steel stocks hitting new highs and credit card issuers bouncing back on encouraging results and moderate credit losses this month. All last year, the Fed tightened against a slowing economy as bond yields and the dollar rose and the S&P 500 remained in a sustained downtrend despite corporate earnings remaining at record highs. was In recent months, the Fed seemed almost done with rate hikes. The economy showed some traction and bond yields and the dollar rolled over significantly. As of late last week, the index has broken above the troubling and widely watched downtrend line. In the process, the S&P diverged positively from the path of his 2007 to his 2009 brutal market meltdown. This is the trajectory of a doom loop that followed fairly closely as of a month or so ago. “Analog charts” like this remind us of how the past cycle can rhyme with the present, but they are always more for entertainment purposes than practical guidance.2000 The 2002 decline was also triggered by overheated tech mania, low unemployment and a tightening Fed. Clearly, things could get worse and we could get back on track after the tech bubble burst in the early 2000s. However, none of the preliminary S&P 500 gains during that period were as far above the 200-day moving average as the current index is. In other words, the market itself has endured the plausible but little-believed idea (2 weeks (as explained here before) in a way that builds credibility. And perhaps an upward trend in results is underway. Will it be the same in January? Much can be done from January’s claimed power in predicting how the year will unfold for markets, but there are too many misdirections to give it that much predictive power. There was a move to In a more targeted analysis, Nerad + Deppe Wealth Management’s Steve Deppe said on his Twitter that the S&P is currently trailing his four-month rally of more than 10%, while the past 12 months are down. He pointed out that it is still sluggish. In his nine settings after 1954, he climbed each time over the subsequent 2-12 months, with above-average climbs and minimal setbacks. Granted, this is data mining and the sample size is limited, but you have to think about what happens next. All this is impressive, if not conclusive. But of course there is always the next challenge in the market. After breaking out of the old downtrend line and pushing up four consecutive positive Friday tapes, the short term is a little hotter (upper trend band and second highest in the past year at 14 Make sure you are hitting the day relative intensity readings). ), but not extremely overbought.Vital Knowledge founder, strategist and equities forward Adam Crisafri wrote in a letter to clients on Friday that “the sources of support for equities remain in place (strengthening disinflationary factors, declining financial overages, earnings tailwind), but the S.&P 500 ceiling is still at 4100-4150 (levels around the corner) and if things continue at this pace for the Fed it’s likely [Feb. 1] The decision provokes a “sell the news” reaction. As a result, short-term risk/reward doesn’t look very attractive, with just above 4100 being the late November/early December high and the level where the S&P 500 futures price/earnings ratio will return.18 Into, even though it remains inflated by half a dozen of the largest stocks and the comparably weighted S&P 500 fell below 16 P/E, a tighter level. It’s hard to decipher.It’s also a much-hyped version of the usual January effect, with the worst stocks of the previous year and poorer districts of the market making a comeback in the new year. Investors’ overall market attitude has become less defensive with hedge funds adding exposure and avoiding shorts, but sentiment and positioning are perfectly aligned. The data are certainly not in an overly optimistic zone. Equity exposure is at his highest level since April, but remains in the bottom 25% of all indices since 2010, according to Deutsche Bank’s consolidated positioning index. The US Treasury yield curve against leading economic indicators. Most were reliable and had unpredictable lead times, but are now heavily driven by ‘softer’ metrics such as business surveys and consumer expectations. And remember, the stock market was weaker than usual leading up to past recessions before these signals flared up. If the unspoken message in the stock and bond markets is that inflation is last year’s problem, the Fed could pause and get ready to cut rates soon afterward, leaving corporate earnings to collapse. I don’t think so. Stocks are supported. But even with the inevitable macro scares and market switchbacks along the way, that doesn’t mean investors are necessarily stuck in the same old loop of fate.
