Happy days: A bullish case for the stock market
Last year was a bummer for the stock market, with the S&P 500 down 19%. Economists keep predicting a recession in 2023, although they temper that by saying it likely will be a “mild” one, whatever that means. Of course, recessions are never good for equities. Among their many nasty ramifications, they torpedo earnings, which have a huge bearing on share prices.
But let’s say there is no recession, and the economy achieves what’s called a “soft landing,” where gross domestic product slows but doesn’t turn negative. Odds today are pretty decent that the market can turn in a good year. Investors seem to be an upbeat mood lately. The Nasdaq Composite, which got slammed in 2022 due to its dependence on suddenly shunned tech names, is up 11% this money, its best January since 2001. The S&P 500 is up 6%.
What’s heartening is the turnaround in those tech stocks, which once were the locomotive for the market. Their January returns are stunning: Tesla, up 44%: NVIDIA
Helping the optimism is that it looks as if the Federal Reserve is tapering its tightening campaign. When its policymaking body meets on Wednesday, the futures markets expect it to hike by just a quarter percentage point, then a similar one at its next conclave. That’s far down from the series of 0.75-point boosts we endured last year. Hand in hand with this is the deceleration of inflation, which prompted last year’s punitive rate hikes.
Plus, the economy isn’t showing evidence of a huge impending downturn, if jobless claims are any indicator. Sure, there have been headline-grabbing layoffs at big companies such as Alphabet (Google), Microsoft
Earnings are expected to downshift this year to 4%, from previous double-digit levels. Still, anything in positive territory is a good sign for companies and the market is sure to take notice, especially in light of all the gloom and doom were went through in 2022.
As Delta Asset Management puts it in a client note, the current environment is pretty decent for investors. The firm wrote that “the financial strength of U.S. consumers may be one reason the market appears to be discounting the risk of recession so far this year. U.S. consumers are better off than they were pre-Covid and materially better off than at any time over the past 40 years.” Credit card delinquencies are also below pre-pandemic levels.
The market’s rally this year is heartening. The so-called fear index, or VIX, is below 20, down from 34 in October. And then there’s the January effect. When the market has a winning January, the rest of the year usually comes in ahead, as well. Further, back-to-back annual drops in the S&P 500 seldom occur. This has happened just two times since World War II: in 1973-74 (Arab oil embargo) and 2000-2002 (the dot-com bust).
Yes, the pandemic may have skewed all the indicators we rely on. Yet investors still stand a good chance of having a happy year.
Source: https://www.forbes.com/sites/lawrencelight/2023/01/29/2023-a-good-year-for-stocks-sure/