In a year of slippery markets, the tape proved surprisingly sticky. Of course, the indices lost ground last week, with the S&P 500 slipping 3.4% exactly from the perch that skeptics would have bet, the level just above 4000 that marked the unseen but so far impenetrable from January 3rd. market peak. Still, where it has been for most of the past week and indeed the past month was a familiar spot, between 3900 and 4000, closing at 3934. That’s less than half a percent of l where he settled on Nov. 10, the day stocks rallied on a weaker-than-expected consumer price index release. This is almost exactly where the index was on May 12, just seven months ago. On the side for seven months, in which the Federal Reserve raised rates a full three percentage points, the S&P 500 earnings forecast for 2023 fell 8%, the Fed’s balance sheet shrank 400 billions of dollars and bitcoin prices – not to mention a few. big crypto dealers – collapsed. Assessing the risk/reward for the market heading into 2023 comes down to whether this rigidity is more like resilience that demands respect or complacency that urges caution. And, by extension, it means passing judgment on whether the currently prevailing view that a recession awaits by mid-2023 is both correct and not yet priced in financial markets. Mixed messages Market indecision reflects mixed macro messages circulating. Long-term Treasury yields have fallen sharply over the past month, with the 10-year decline dropping from 4.2% to a low of less than 3.5% last week as bond traders all but moved past fear of inflation – taking both strong monthly wage growth numbers and upward surprise producer price inflation in stride – to elevate the outlook for economic growth to a major concern. Adam Crisafulli, founder of investment research firm Vital Knowledge, said: “My primary focus for this market is to determine whether the disinflation outlook is improving at a faster rate than the growth outlook and earnings. deteriorate – if this continues, it’s hard to be super bearish.” As the interaction described here suggests, the path to a positive outcome is quite tricky, with several variables having to cooperate in a timely manner. Certainly plausible, at least relative to how markets are priced. Many strategists and risk managers are nonetheless perfectly willing to take a bearish stance, obsessing over falling major economic indicators and steeply inverted Treasury yield curves as reliable – if sometimes uncomfortably early – warning signs. of an economic slowdown. Banking stocks hit a new relative low against the wider market and oil defies energy bulls to fall into a year-to-date decline. It sums up the picture of an economy in general slowdown, and yet the starting point was such a high level of activity – of demand for goods, of consumer savings, of business profitability, of job – that conditions can get worse without getting really bad for a while. For example, customer data from Bank of America shows that while credit card use has increased significantly this year, borrowers are still using a significantly lower percentage of their credit limits than before the economic crisis of Covid. This aligns with a variety of other metrics, from continued jobless claims (a new cycle high last week but lower at almost any time between 1973 and 2020) to still-large “excess savings” in bank accounts at large ratio of household financial obligations to disposable income. Things are tougher than they were at their easiest last year, but not that tough overall compared to normal times. Meanwhile, there are trade-offs: Falling Treasury yields have pushed mortgage rates down from their recent highs, while gasoline prices are down a third from their peaks in the past. middle of the year. What is the price ? The macro debate will not be settled for a while. The prospect of a recession on the horizon is not refutable in advance, which will likely continue to keep animal minds in suspense, and the struggle is to determine what counts. To get a read on this, it’s helpful to go back to when the S&P 500 hit its current level just below 3950: March 2021, about 21 months ago. Here’s how the valuation of the Nasdaq 100, S&P 500 and the equally weighted version of the S&P 500 has evolved since then. Even now, the current setup doesn’t fit anyone’s definition of a cheap stock market with a big margin of safety. Yes, as almost everyone is saying, there is downside risk to earnings forecasts for next year, although cost-cutting by spooked CEOs, a falling US dollar and broadly high levels of nominal GDP could prevent cuts from going too far. Yet it shows that the excess valuation, to the extent that it’s still in the market, resides in the most important stocks at the top of the Nasdaq and S&P. There is a way to write the history of 2022 on Wall Street as a long year of reset and recovery. : several years of delayed normalization of interest rates imposed over nine months, excess valuation in speculative technology and crypto purged, healing of supply chains, demand pulled forward for durable goods reverting to the mean. Yet few market handicappers are deploying this argument as a reason to predict better times in 2023. A fairly tight consensus has developed among strategists that the S&P 500 will see little to no upside, with a bad run to new bear market lows. in early 2023 before a recovery once a recession is underway the Fed becomes friendly or both. Just because this view is popular doesn’t mean it isn’t plausible. In fact, it’s popular because it’s plausible. But at least it suggests that for all the challenges facing this so far resilient market, dangerous complacency doesn’t seem to be one of them.
#Assess #riskreward #market #recession #awaits