Happy Days: A bullish case for the stock market
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The past year has been a bummer for the stock market, with the S&P 500 down 19%. Economists continue to forecast a recession in 2023, though they’re tempering that by saying it’s likely to be a “mild” recession, whatever that means. Of course, recessions are never good for stocks. Along with their many unpleasant effects, they torpedo profits, which have a major impact on stock prices.
But let’s assume there is no recession and the economy achieves a so-called “soft landing” where gross domestic product slows but does not turn negative. The odds are pretty good today that the market can have a good year. Investors appear to have been optimistic of late. The Nasdaq Composite, slammed in 2022 due to its reliance on suddenly shunned tech names, is up 11% in the money, its best January since 2001. The S&P 500 is up 6%.
Encouraging is the reversal in these tech stocks, which were once the market’s engines. Their January returns are stunning: Tesla up 44%; NVIDIANVDA DIA up 39%; Metaplatforms (Facebook), 26%; Netflix NFLX, 22%; AmazonAMZN , 21%.
Adding to the optimism is the prospect of the Federal Reserve phasing out its tightening campaign. When his policy-making body meets on Wednesday, futures markets expect him to rise just a quarter of a point, then a similar point at his next meeting. That’s a far cry from the streak of 0.75 point boosts we endured last year. Hand-in-hand with this is the slowdown in inflation that led to last year’s punitive rate hikes.
Also, the economy is showing no signs of a major slowdown imminent if jobless claims are any indicator. Sure, there have been headline-grabbing layoffs at big companies like Alphabet (Google), MicrosoftMSFT, Salesforce, Spotify, and BlackRock. This is offset by the hiring frenzy that persists at the small businesses that ultimately employ most Americans. GDP grew by 2.9% in the fourth quarter of last year, showing that economic output is slowing, but is hardly on the wane.
Earnings are expected to fall to 4% this year from previous double-digit levels. Still, anything in positive territory bodes well for companies, and the market is sure to take notice, especially given all the gloom and doom that 2022 has gone through.
As Delta Asset Management says in a note to clients, the current environment is quite decent for investors. The company wrote that “the financial strength of US consumers may be one reason why the market seems to be pricing in the risk of a recession so far this year. US consumers are doing better than they did before Covid and significantly better than at any time in the last 40 years.” Credit card defaults are also below pre-pandemic levels.
The rally in the market this year is encouraging. The so-called fear index or VIX is below 20, compared to 34 in October. And then there is the January effect. If the market has a good January, the rest of the year is usually ahead as well. Additionally, consecutive annual declines in the S&P 500 rarely occur. This has only happened twice since World War II: 1973-74 (Arab oil embargo) and 2000-2002 (the dot-com bust).
Yes, the pandemic may have skewed all the indicators we rely on. Nevertheless, investors have a good chance of a happy year.
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