John Templeton famously stated that “bull markets are born with pessimism, grow with skepticism, mature with optimism, and die with euphoria.” I’d say we’re still bearish after the S&P 500 rose more than 16% since the bear market low in October. The certainty with which the bearish consensus believes the market will retest last year’s low, if not break below it, is what makes me think not. Despite the mixed earnings news, stocks rose last week, as investors welcomed another drop in inflation measures that was accompanied by a slower, but still positive, economic growth rate in the fourth quarter of last year. At the same time, the labor market remains strong, with weekly unemployment claims falling to just 186,000. We’re on track for one of the best Januarys in twenty years, which bodes well for the rest of the year, as a gain in January has led to a gain for the year two-thirds of the time in the last fifty years.
Edward Jones
The Fed's preferred inflation measure is the Personal Consumption Expenditures (PCE) price index, which fell to 5% in December, while the core rate excluding food and energy fell to 4.4%. These are the lowest rates we've seen since late 2021 and are falling without the significant job losses that many feared would derail the current economic expansion. This is why more and more investors are leaning toward the idea of a soft landing in 2023. It's also why consumer sentiment is gradually recovering.
Bloomberg
At its last meeting in December, the Fed raised its forecast for where the inflation rate would end the year from 5.4% to 5.6% for the PCE and from 4.5% to 4.8% for the core PCE. They should have lowered the numbers. However, the latest data should lead to reaching their year-end targets much earlier for 2023, and I suspect this will be reflected in the next update of their Summary of Economic Projections.
Federal Reserve
The annualized inflation rate in the fourth quarter of last year fell from 4.3% in the third quarter to 3.2%, while the core rate fell from 4.7% to 3.9%. I expect both to remain within a range of 2-3% by the end of this year.
I'm looking for the alpha
While the Fed will certainly raise rates by a quarter-point this week, there should be enough evidence of disinflation at its next meeting in March to end the hike cycle with a terminal rate of 4.5-4.75%. The odds of this fluctuating between 15 and 20% in the Fed funds futures market last month, but were virtually zero a few months ago. As this probability increases, it should support risk asset prices.
ECM Group
This positive trend in inflation and interest rates explains the stock market's recovery over the past three months. Rates of change are improving, which is what matters most for the markets.
We're now beginning to see extremely positive technical developments in the major market averages, which are transforming bearish trends into new bullish trends. The Nasdaq Composite finally broke above its 200-day moving average. Market breadth has been exceptionally strong. Last week, four sectors of the S&P 500 completed golden crosses, which occur when the 50-day moving average rises above the 200-day mark. The fact that these four sectors are financials, industrials, materials, and energy is also good, as this type of leadership is not indicative of a recession on the horizon.
Stock charts
As the outlook for the year continues to improve, we're poised to see increased volatility this week with the Fed's rate decision and subsequent commentary from Chairman Powell. He will likely attempt to limit further gains in stock prices with hawkish rhetoric to limit further easing in financial conditions. Furthermore, some short-term technical measures are entering extended territory, making the market ripe for a pullback. However, a healthy pullback that results in a lower price is the glue that keeps the uptrend going.
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