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Investing is all about conditions.
The best investors on the planet do not know “for sure” what will happen from one year to the next.
It is all about conditions or "factors" that favor a lower or higher stock market.
For 2022, the conditions were ripe for a bear market in stocks. This is exactly what I told you last year based on the conditions at the time.
But the conditions look much different in 2023…
…as the stock market is now sending out mixed signals.
There is No “Silver Bullet”
I served as the senior analyst at an investment research company for nearly a decade.
I’ve also written a book on investing that sold thousands of copies around the world.
And as you probably know, I’ve established a bit of a social media presence where I help 500,000 people every month invest in the stock market.
Despite this experience, I don’t know for sure what the stock market will do.
But I can look at conditions to gauge where we might be headed both in the short-and long-term.
The Indecisive Q1 Earnings Season
I went on record saying I expect -15% more downside in the S&P 500 this year.
But like any good analyst, I’m happy to change my mind if new information comes to light.
For instance, I expected the -15% decline in the S&P 500 because of a looming earnings recession. This was based on the yield curve inversion which has preceded every economic recession in the last 40 years:
Since S&P 500 earnings fall on average nearly 20% during earnings recessions, it followed the S&P 500 would likely have more downside in 2023:
But so far, this cycle’s earnings haven’t been that bad. Companies like Tesla (TSLA), Netflix (NFLX), and American Express (AXP) have posted solid earnings:
On the other hand, Microsoft (MSFT), Goldman Sachs (GS), and others have clearly shown a down tick in earnings. And with nearly 50% of the S&P 500 - including Apple, Amazon, and Alphabet - reporting earnings next week…
…we’ll have a better idea whether we’re in an earnings recession in the next few days.
But earnings aren’t the only red flag on my radar for 2023.
Don’t Fight the Fed
Stocks are off to their best start to a year since 2019:
Naturally, this has many wondering if 2023 will turn out like 2019.
That year’s +30.4% S&P 500 return came on the heels of -19% decline in 2018 due to the Federal Reserve raising interest rates.
Many are drawing comparisons to the current market where we are also coming off a Fed-induced bear market.
But the comparison isn’t as apt as you might think; the Fed raised rates from 2016 to 2018 to “normalize” their monetary policy. This is very different to their reasons for raising rates in 2022 (i.e. the highest inflation in 40 years):
And when markets sold off in 2018, Jerome Powell quickly altered course and even started lowering interest rates. I don’t expect Powell to “pivot” in 2023 until it’s clear we’re on track to an inflation rate of 2%.
After all, Powell is doing his best to avoid a repeat of the 1970s when inflation roared back even higher after the central bank started easing policy too early.
To take this a step further, I don’t think the Fed’s higher rates have been reflected in corporate earnings yet.
But that doesn’t mean I don’t see some encouraging signs for the market.
A Few Bullish Signs for Stocks
Even though we’ve seen earnings downgraded at their fastest pace in years…
…many companies are reporting sales and profits above analyst estimates. That’s a good sign that the earnings recession boogeyman may be further off than expected.
But it’s not the only encouraging sign I’m seeing. One indicator you typically see flash at the beginning of a new bull run is an increase in market breadth. The easiest way to understand “breadth” is it’s the number of stocks rising and falling at any given time.
For example, if the S&P 500 is rising but the number of stocks participating in the advance is limited, it may be a sign that the market is overbought and due for a correction. But we’re seeing the opposite dynamic play out…
…as over 60% of S&P 500 companies are now trading above their 200-day moving average. This means we’re seeing a broad-based rally in the S&P 500.
In addition, the S&P 500 index has also crossed above its 200-day moving average (red line)…
…which implies the technical picture for the S&P 500 is improving. Lastly, the 50-day moving average (blue line) is crossing the 200-day moving average (red line) which is known as a “golden cross.”
We’ve had 52 golden crosses since 1930. And 71% of the time, the S&P 500 is higher a year later.
Don’t Sweat the Small Stuff
I do not know for sure what will happen in the short-term.
But despite the latest rally, the current conditions have me leaning more pessimistic.
Bear market rallies can go on longer than people expect. For instance, the Nasdaq rallied 51% in late 2001 – above the 200-day moving average – only to make new lows.
In fact, the Nasdaq dropped 47% after the rally:
That said, my long-term view of the markets in unchanged…
…which is a key reason I am still nearly fully invested:
Because even though I expect near-term market weakness, I know the best kept secret in investing is that stocks tend to rise over the long-term.
The trick is to make sure you’re holding the right stocks.
And that’s exactly what I plan to keep doing.
Stay safe out there,
Robert