VIDEO: The Narrative Shifts from Inflation to Growth
Welcome to my latest Mind Over Markets video presentation. The article below is a condensed transcript; the video contains additional details and several charts.
The year 2023 has kicked off on a bullish note, fueled by reassuring inflation data in the U.S. and around the world. Central bankers in this country and in Europe are signaling that they might soon get less hawkish. Year to date, the main U.S. stock market indices are in the green, as are most of the overseas benchmarks.
The U.S. equity benchmarks closed sharply higher on Monday, as follows:
- DJIA: +0.76%
- S&P 500: +1.19%
- NASDAQ: +2.01%
- Russell 2000: +1.25%
That said, stocks dipped last week. The U.S. saw weaker manufacturing activity and retail spending, and China posted anemic gross domestic product (GDP) growth for 2022. The Chinese economy grew on a year-over-year basis by only 3% in 2022.
Meanwhile, Washington descended into acrimony over the debt ceiling. A default would crater the financial markets, but some members of Congress are more interested in putting on a colorful show for the media than in solving problems. Fortunately, political risk tends to be short-lived. A resolution of the debt ceiling crisis is likely, but not before the nation is subjected to a lot of tiresome histrionics.
As for corporate earnings, they continue to come in mixed. For Q4 2022, with 11% of S&P 500 companies reporting actual results, the blended earnings decline is -4.6%.
However, if the long-term trend of companies beating expectations is factored in, we should see Q4 earnings season end in positive territory. The actual earnings growth rate has surpassed the projected earnings growth rate at the end of the quarter in 38 of the past 40 quarters for the S&P 500.
Stocks pared the week’s losses by soaring last Friday. On the last trading day of the week, the New York Stock Exchange Advance Decline line (NYAD) notched a new high and the tech-heavy NASDAQ posted its third straight week of wins. Those gains were extended Monday, with the tech sector, especially semiconductor stocks, continuing to lead the rally.
Another sign of economic optimism is the rebound in crude oil prices, which gained 2.3% last week. Increases in demand and fears of supply disruptions have put upward pressure on oil prices.
This year, I believe that concerns about inflation and interest rates will increasingly give way to a solid case for growth.
Goldman Sachs (NYSE: GS) expects the S&P 500 to end 2023 at between 4,200 and 4,300 points, up to 12% higher than its 2022 year-end level.
According to an analyst consensus tabulated by research firm FactSet, the bottom-up target price for the S&P 500 is 4504.39, which is 13.3% above last Friday’s closing price of 3972.61. The consumer discretionary (+22.6%), communication services (+20.8%), and information technology (+18.9%) sectors are expected to see the largest price increases. These are considered growth-oriented, cyclical sectors.
The economy is slowing, which is actually good news because it squashes inflation. We’re already seeing signs that jobs, wages, and home prices are slackening. Disinflationary pressures are building across the board, and yet, the economy has been avoiding an outright recession (so far). The elusive “soft landing” is a distinct possibility.
The start of 2023 has been choppy, and we probably face further volatility ahead. But remember this important rule: liquidity drives the markets. Once the Fed pauses and stops siphoning off liquidity, stocks will surge.
The next Federal Open Market Committee (FOMC) meeting is scheduled for January 31-February 1. The expectation is that the FOMC will hike rates by another 0.50%, but there’s also a chance that it will make a surprisingly dovish move and opt for a lesser 0.25% boost.
A steady decline in rates over the past two months has forged a consensus that rates are likely to level off through early 2023. Since 1980, in the 12 months after the final Fed rate hike, the S&P 500 was up on average about 15%.
In the week ahead, keep an eye on these market-moving reports: leading economic indicators (Monday); S&P U.S. manufacturing and services PMIs (Tuesday); initial jobless claims and new home sales (Thursday); and the PCE price index and consumer inflation expectations (Friday).
The tech megatrends of 2023…
The table is getting set for a new bull market. To be sure, we still face several risks, such as political gridlock in Washington and the Russia-Ukraine war.
However, one day soon these headwinds will dissipate, and that’s when we’ll see an explosion of new advancements in 5G wireless, genetic engineering, the cloud, green energy, electric vehicles, artificial intelligence, 3D printing, nanotechnology, space exploration, the Internet of Things…and more.
High-beta tech stocks are particularly sensitive to inflation and interest rates. When stocks eventually rally because of falling inflation and rates, tech stocks should outperform.
There’s a strong argument for increasing your exposure to the stocks on your “wish list,” especially the brand name tech stars that had gotten too pricey.
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John Persinos is the editorial director of Investing Daily.