The stock market enters the second half of the year with a total return of almost 15% so far in 2023
As 2023 rolled around, the market constellation appeared to have shifted sharply in the negative direction in terms of recent performance and investor expectations. The S&P 500 had just suffered its worst calendar-year loss in half a generation. Professional economists as a group forecast a record-breaking likelihood of a recession on December 31st. Investors flocked to cash-equivalent vehicles that offered the enticing novelty of a 5% yield. Those investing in equities overwhelmingly favored the defensive stance, with a broad consensus that Big Tech’s old favorites would continue to fall out of favor. It presented a fairly clear opportunity for an assertive contrarian approach – perhaps emboldened by the strong recovery from October’s bear market bottom – to reach for the most penalized, aggressive stocks while betting that the economy will recover despite the gradual easing of the Federal government Reserve raised interest rates towards its yet unknown ultimate target. As noted here in January, such a case was taking shape, albeit a highly fortuitous and fragile case that requires further confirmation. But after a total return of nearly 15% for the S&P 500 this year, clearly led by the old Nasdaq favorites, there has been a shift towards greater investor bullishness, broader acceptance of the “soft landing” economic scenario ‘ and a Fed-In As this is a data dependent wait pattern, the market is more balanced and the risk/reward weighing process in the second half of the year is a tighter decision. Textbook Consolidation The S&P 500’s modest 1.4% decline over the past week did little to alter the benign underlying market bias or the notion that further consolidation may be on the horizon. The performance was instructive on several counts: indices were heavily overbought when monthly options expired on June 16th, the week following the June expiration date was historically weak and investor sentiment and positioning shifted towards more optimism and risk-taking. The long-running weekly Investors Intelligence survey of professional market advisory services has moved into the upper part of the net uptrend from a sustained downtrend. The chart here shows that this indicator mainly reflects the underlying market movement itself and when it is at similar levels after a long period of muted attitudes, it usually does not lead to a significant market top. Ed Clissold, chief US strategist at Ned Davis Research, had a similar sentiment when his company’s short-term sentiment composites spiked into bullish territory: “A cyclical top rarely comes when sentiment rarely crosses into the bullish zone. Instead, see to it that sentiment composites remain in it.” excessive optimism on bad news as a sign that the market has reached the top of the worry wall.” Climbing the Wall of Worries Importantly, Wall Street is in the first Six months has worked hard to raise this wall of worry while some building blocks fell away. In January, the New Year’s rally bemoaned the outperformance of ‘crappy’ speculative stocks, although this is true in both new bull markets and temporary fake rallies. In February, the Fed is said to have hiked short-term interest rates to 6% on hot January jobs data. In March, SVB Financial failed and there was talk of a sudden credit crunch. In April, the market rally was attacked for being over-reliant on some mega-cap tech names, while once the debt ceiling deal was reached in DC, a new scare story circulated that the Treasury was holding dangerous amounts of liquidity sucking from the markets as it furiously gave up debt to replenish its cash stash. In general, I resisted each of these whipped-up perceived threats, not because they posed no danger, but because the crowd was so quick to spread them, which said more about investor anxiety than the impending danger. That being said, it seems like the recent rally, subsidence in volatility and good economic data lately have made investors less inclined to look for the next evil catalyst – another sign that the bull-bear debate is on the up The move is more even. That’s not quite the same as saying, “Everyone is bullish.” The median year-end target for the S&P 500 among street strategists is 4250, 100 points below Friday’s close, and the most optimistic forecast is one further increase of about 5%. Already overrated? Sure, the AI-driven speculative energy has swept through the limited number of big stocks focused on this theme, sending Nvidia into the stratosphere. But the whole thing only started rolling seven months ago. We haven’t even seen a whole string of IPOs to capitalize on the fever, and no true madness worthy of the label doesn’t have one. Still, stocks have quickly recouped much of the fall in valuations caused by last year’s bearish streak. The Nasdaq 100 peaked in November 2021 at 31x forward 12-month earnings, bottomed at just under 20x and has rebounded to 27x. The old high may have been even higher as earnings fell short of expectations the following year. So if gains are made as expected over the next year, the index may be a bit further from that valuation peak. And just as market performance is focused on these successful hyper-cap tech stocks, so is the valuation of the S&P 500. WisdomTree CIO Jeremy Schwartz noted last week that outside of the “extended technology sector” — the traditional grouping before S&P ditched many internet stocks — the rest of the index is now right at its 30-year median P/E of 16.7x is traded . As all of this shows, the bullish factors are no longer clear cut or unrecognized, while the bearish inputs are asterisked detailing possible mitigating elements. Without giving them undue authority, the traditional harbingers of an economic recession, such as the long-inverted government bond yield curve and the steep decline in leading indicators of the economy, should probably not be ignored either. There’s a good case for the market doing quite a bit last year when it expected a slowdown, and even now cyclical weathervane stocks like Capital One Financial, General Motors, Whirlpool, and Best Buy are all down between 30% and 40%. during the last two years. RBC Capital strategist Lori Calvasina took this view early on, even invoking the late 1940s cycle in which the stock market largely ignored a brief recession following the inflation shock and budget cuts that followed World War II. An intriguing but as yet untried take. .SPX 1Y Mountain S&P 500 1 Year Overall Picture: The market chewed through many perfectly valid excuses this year to stall without doing so. The major indices are in a clear uptrend and are digesting upside in the short term. The S&P 500 is still well above its 50-day moving average, but down nearly 10% from 18 months ago – when US nominal GDP was 15%. lower and the Fed was on the verge of raising interest rates by five percentage points in record time. Meanwhile, housing activity and industrial production appear to have already started to recover. It looks like there won’t be a big statement, but Bespoke Investment Group elaborated on the untrustworthy economic outlook alongside the reassuring tape action on Friday: “As we keep saying, if the signals are mixed, we will always do.” Leave it to the market. At this point, the market hasn’t even touched the previous highs from last August, so the bulls still deserve the leap of faith. However, given the economic and interest rate backdrop, investors should hold on, and even consider shortening the leash.
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