“I haven’t the faintest idea as to whether stocks will be higher or lower a month or a year from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
Warren Buffet, 2008
In recent weeks, many stocks have fallen, spooking investors that maybe 2023’s hot start won’t last. Tom Lee has acknowledged that gains will be limited in the short run into March. But there’s no thesis change to his bullish 2023 outlook: Inflation will cool into the summer. Said Lee this week:
“If you look at the 14 rate cycles that lasted more than 12 months, 11 out of the 14, markets rallied into highs with the hikes. The two exceptions were (under Arthur F. Burns, 1970-78) who was higher in a hurry. Once (Paul) Volcker became fed chair, hikes were associated with higher stock prices. With (Alan) Greenspan, there were five cycles of his raising. Five of five times markets marched higher to all-time highs.
“So, unless Powell is invoking his inner Burns, I think the stock market is going to appreciate data dependence,” Lee added.
At our weekly research huddle, Mark Newton noted that ever since stronger-than-expected retail sales and CPI numbers, “the narrative changed for the market and everybody said, ‘Well the economy is a lot stronger and the Fed’s going to have to hike for longer.’”Newton, Head of Technical Strategy, noted that the equity put-to-call ratio has reached the year’s highest levels, at 0.80. “Fear and Greed has backed off pretty sharply too,” he said. “We were at pretty optimistic levels. Arguably, it’s still mid-range, but it’s not nearly what it was. There had been a big diversion between overall long-term and short-term sentiments. Short-term sentiment got optimistic earlier in the year. Now that seems to have retreated.”
Newton concluded that from a technical standpoint, the recent softness “really hasn’t been all that damaging. Up trends are still very much intact, and we’re still above the 200-day moving average today. If you want to have confidence, you wait until we get over 4060. That’s going to be a very bullish sign. I think that’s going to happen in the next week. A lot of this though, it does depend on rates and the dollar [which touched a seven-week high on Friday] starting to pull back.”
Newton also noted energy stocks should be close to bottoming. “I like energy, I like healthcare,” he said. “Counter-trend trades like energy and healthcare will look much better in the months to come.”
He said sentiment has grown too negative, treasuries should rally, meaning yield should fall and stocks should rally again in March. Ken Xuan, Head of Data Science, concurred. “We are still constructive on the market,” he said. “February was expected to be choppy, especially after strong gains in January.”
Other notes from Newton:
- S&P could reach 4200, maybe even last August’s high of about 4325.
- Weekly momentum and breadth, which refers to how many stocks participate in a given move, is in good shape.
- While many investors anticipate higher rates to drive stocks lower, Newton said: “I like to take the other side of that. Any further pullback that causes sentiment to get even more bearish (will) create a really good opportunity.”
- Other favorites: Technology, semiconductors
As a reminder, the first half of pre-election years historically is strong.
The winter has been mercifully mild in Western Europe amidst a natural gas shortage sparked by sanctions against Russia, leading to nearly full stockpiles and falling wholesale gas prices. Worried stakeholders are now looking forward. Many of the tactics EU nations used to prepare for this winter will be unavailable if the war is ongoing next winter.
President Biden has nominated the former CEO of Mastercard, Ajay Banga, to lead the World Bank. If confirmed, Mr. Banga would replace David Malpass, who is resigning after coming under fire for his views on climate change. The India-raised Banga is noted for his in-depth knowledge of the digital economy and the challenges developing economies face.
Sixty-one UK companies and their 2,900 employees have been experimenting with a four-day work week for the past six months, and 56 of them reported that it had worked well enough to justify continuing to experiment with the unorthodox schedule. The study’s sponsors said most participating organizations reported no decline in revenues or productivity.
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