Welcome to my latest Mind Over Markets video presentation. Below is a transcript, edited for concision. My video performs a “deeper dive” and contains several charts.

After a brutal 2022 for the markets, investors are starting 2023 in a risk-on mood, as the major U.S. stock market indices post two consecutive weeks of gains. The technology-heavy NASDAQ has been leading the way, as signs emerge that we’re winning the inflation fight and the Federal Reserve might pause in its tightening cycle.

It begs the question: are we witnessing yet another bear market rally, or does the January rally have legs? I’ll get to that in a minute. First, let’s savor last week’s positive performance.

For the week, the Dow Jones Industrial Average gained 2.0%; the S&P 500 gained 2.7%; the NASDAQ gained 4.8%; and the MSCI EAFE, which measures international stocks, gained 3.3%. The benchmark 10-year U.S. Treasury yield slipped -0.1%.

Markets outside the United States are rebounding and in some cases are nearing their all-time highs. In a sign that Wall Street is bullish about economic growth, small-caps are outperforming their large-cap brethren.

The positive catalyst for last week’s gains was the consumer price index (CPI) reading in December, which gave us some really good news.

The Labor Department reported last Thursday that the headline CPI rose 6.5% from a year ago, the smallest annual increase since October 2021 and in line with expectations. Core CPI (excluding food and energy) rose 0.3%, also meeting expectations. Core rose 5.7% from a year ago, again in line.

The headline CPI declined 0.1% month-over-month in December, meeting consensus expectations. That represented the largest month-over-month decrease since April 2020, during the early days of the pandemic outbreak.

December’s shelter index continued to increase, rising 0.8% over the month. However, falling home prices suggest that shelter inflation will start to dramatically cool. Higher interest rates are undercutting the housing market, a trend that’s disinflationary.

Investors are now expecting the Fed to get less hawkish in 2023, a turning point that would be manna for equities.

Bullish technical trends suggest that the rally has lasting momentum. Consider the 200-day moving average, a popular technical indicator which investors use to analyze price trends.

The 200-day moving average represents the average closing price over the past 200 days. The moving average gives us a clue as to whether the trend is up or down; it also identifies potential support or resistance areas.

The S&P 500 rose last week as it crossed its 200-day moving average and finished the week near 4,000, its highest close in the past month. The index is up nearly 4.0% year to date.

U.S. stocks generally declined Tuesday, in the wake of weak fourth-quarter operating results from Goldman Sachs (NYSE: GS) that sent GS shares tumbling. The main indices closed as follows:

• DJIA: -1.14%
• S&P 500: -0.20%
• NASDAQ: +0.14%
• Russell 2000: -0.15%

Regardless, the rally so far this year has been led by cyclical stocks, not defensive ones. That trend augurs well. The S&P sector leaders Tuesday were technology and energy.

The week ahead…

The Big Banks kicked off Q4 earnings season last week with a mixed bag of results. Higher interest rates are generating greater interest income for bankers, but much of that income is getting offset by bigger provisions for expected loan losses.

Q4 earnings are scheduled in the holiday shortened week ahead, from bellwethers in the banking, consumer products, and airline industries. We’ll get a better idea if earnings are resilient or herald an earnings recession.

On the docket in coming days are these key economic reports: retail sales and Beige Book (Wednesday); initial jobless claims, building permits, and housing starts (Thursday); and existing home sales (Friday).

The upshot: Inflation hedges served you well in 2022, but now it’s time to increase your exposure to growth-oriented, cyclical stocks that are poised to benefit from the market’s improving fortunes in 2023.

Of course, politics remains a wild card. The U.S. is expected to hit its debt ceiling on Thursday, January 19, with the GOP majority in the House threatening to let the deadline lapse unless major cuts are made to Social Security, Medicare and Medicaid. The Democrats have vowed to block such cuts.

If the debt limit isn’t raised by Congress this week, it would force the country into default and consequently roil the markets. A default would boost interest rates, which would then increase prices and worsen inflation. U.S. investments would be seen as less safe.

Let’s hope the political stalemate is just kabuki theater and a workaround is reached. Stay tuned.

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John Persinos is the editorial director of Investing Daily.

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