(Bloomberg) — A lull in the stock market’s strong start to 2023 has highlighted a key question plaguing many on Wall Street.
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Indeed, the slowdown in inflation has bolstered the Fed’s confidence that it can quickly end the cycle of aggressive rate hikes that sent the S&P 500 index to its worst decline since 2008 last year. rice field. Higher interest rates could push the economy into recession and put the brakes on growth.
Positioning this financial yin-yang is difficult, to say the least.
“While the S&P 500 has never bottomed out before a recession hits, it remains to be seen if the U.S. economy will actually slip into recession,” said Ed Crisold, chief U.S. strategist at Ned Davis Research. It’s not clear,” he said. The US predicts he will enter a slowdown in the first half of 2023. All of these conflicting trends make it difficult for investors to invest in U.S. equities. ”
With these reversals, stock markets are gearing up for a shaky start to the year as investors rely on upcoming economic data and eyeball historical trends for clues. The S&P 500 fell 0.7% last week, snapping a two-week winning streak, but the index rose 1.9% on Friday as Fed officials eased concerns about an overly aggressive policy move. bottom. The tech-heavy Nasdaq 100 index hit its highest level since Nov. 30, with him up 0.7% in a week.
Crisold said the past performance of various sectors will guide where to invest heading into a recession. Companies that tend to peak late in the economic cycle, such as material manufacturers and industrial companies, typically post strong performances six months before a recession. The same goes for consumer staples and healthcare stocks.
At the same time, stocks in rate-sensitive industries such as finance, real estate, and growth-oriented technology tend to lag during that period.
The problem is that the extent of last year’s decline makes historical comparisons unusable. In fact, last year’s big losers, including rate-sensitive tech and telecom service stocks, were among the best performers this year, leaving investors wondering if the bear market’s worst declines are behind them. increase.
Next week, the market will sort out the earnings results of Microsoft, Tesla and International Business Machines. Also, on Thursday, the Department of Commerce will release the first estimates of US gross domestic product for the fourth quarter. This is expected to indicate acceleration.
Marc Newton, head of technical strategy at Fundstrat Global Advisors, said the S&P 500 likely bottomed out in mid-October. And he thinks it’s too early to write off crashed technology stocks entirely.
Newton, who monitors whether the S&P 500 can hold its December low near 3,800, said: “While I’m optimistic about U.S. equities this year, the biggest risk to stocks is that the Fed will go beyond rate hikes. case,” he said. “This week’s earnings from tech companies could be a big catalyst. Other corners of the market are stable. will not be able to.”
Forecasters surveyed by Bloomberg expect the economy to contract in the second and third quarters of this year.
It fits one of the standard definitions of a recession, according to data compiled by Bloomberg Intelligence, but since 1979, the official arbiter, the National Bureau of Economic Research, has been skeptical since such a contraction began. We don’t declare such contractions ongoing until an average of 234 days have passed… so don’t hold your breath for a warning.
The stock market is much more likely to be a leading indicator of the beginning and end of a recession. indicates the risk of a recession and bottoms out five months before the recession ends.
“Equities typically price in recessions so quickly that the S&P 500 could rebound before the announcement,” said Gillian Wolfe, senior associate analyst at Bloomberg Intelligence.
S&P 500 Pricing Lower Earnings, Bloomberg Intelligence Fair Value Model Says, But Higher Borrowing Costs And Persistent Economic Uncertainty May Contain Equity Rally Over The Year ahead there is. In BI’s base case, the index at the end of 2023 is expected to be around his 3,977. But if a bullish scenario unfolds, BI estimates he could reach 4,896, up about 23%.
Kevin Rendino, CEO of 180 Degree Capital, is betting that a US recession has already begun. He’s been buying up small-cap stocks, especially technology and discretionary stocks, which he sees at very low valuations.
Small caps have historically been one of the first groups to bottom out before the broader market rises. The Russell 2000 rose 6% in January, beating his 3.5% rise in the large-cap S&P 500.
“While everyone is running away, I’m running towards the beaten small caps,” said Rendino. “They have become the first companies to discount the recovery and have already started doing it compared to large caps. I am not.”
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