Investor Alert: Bull Run 2023 is over?

Hey, are you enjoying the early stock market gains 2023? Me too. Unfortunately, this seems like a mirage with the S&P 500 (SPY) poised to turn lower...and likely to hit new lows in the months ahead. Why is that? Read below for the answer.

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The market was hot to start the new year. Perhaps too hot as applause for lower inflation blocked the noise that these lower prices occurred due to serious recessionary warning signals.

I feel this may be the last gasp for the bulls and the bears are about to take the wheel again.

Why?

That will be the subject of today's comment...

Market Commentary

The new year always brings with it a new optimism. This alone could explain the +4.2% rise in the S&P 500 (SPY) at the start of the year.

On the surface, bulls can signal exciting news that inflation continues to decline. It was the headline read for sure, especially after the 1/12 CPI report. Let's dig deeper...

At this point, month after month is more important than year after year. This is because most of the inflation problems happened several months ago, particularly in the spring of 2022. This makes inflation look high year over year...but the month on month tells you the true current pace.

On this front, we see underlying inflation rising by +0.3% month-over-month, indicating annualized growth of +3.6%, which is good lower than the past...but still well above the Fed's desired 2% target.

Specifically, "sticky inflation" is still a problem. This report shows a +0.8% increase in housing (housing) prices which translates to almost 10% per year. Much too hot.

Further wage inflation was reported last week at +4.6% year-on-year, with the trend slowing slightly to +0.3% month-on-month (+3.6%) per year.

The sum total of this information indicates that the Fed will not change its tone. So given what the Fed has said in the past about keeping rates higher for a long time...and then repeating that mantra over and over again, including last week...then that points to the Fed announcement of Feb 1 as another cold shower for bulls.

Now let's get to the cause of the fall in inflation. It's been 9 straight months of restrictive Fed policy finally doing its job. However, this is the view over the left shoulder. If you look over the right shoulder, you will see that this has come at the expense of an economy on the verge of recession.

48.4 ISM manufacturing on 1/4 with 45.2 new orders (recession bed) 49.6 ISM Services on 6/1 with 45.2 New Orders (recession bed) 89.8 NFIB Business Optimism Index at 1/10 (reading lower than during Covid...reads recession) 1/13 Profit season begins with 2 of the Big 4 banks messing up the bed. JPM warns that they are preparing for recession.

Note that the United States has not experienced an inflation-induced recession since the 1980s, so investors are unsure how to handle this rare environment. This means they are far too interested in watching inflation data and predicting the Fed's likely reaction rather than what they should do. This being to monitor the health of the economy as a guide to whether to be bullish or bearish.

If a recession is on its way, it causes corporate earnings to decline (typically a 20% drop in EPS) and it causes stock prices to fall given what investors are willing to pay for it. weakened earnings profile. That's why it's very hard to be optimistic right now.

Let's move forward with a discussion of earnings season. The prior quarter was probably one of the worst in years as earnings estimates were cut sharply for the quarters ahead. Another round of this would be detrimental to stock prices.

This means we have to watch earnings trends closely. Specifically, the change in estimates ahead and whether current expectations of a 7% decline in first-quarter earnings darken or brighten from here. This will have consequences on the market.

Again, the average recession leads to a 20% reduction in EPS expectations. That's certainly not priced into the stock price right now. All the more reason to watch earnings estimates more carefully. The first bank results point to more difficulties along the way.

Now on to the price action. The bulls have already had enough impressive runs in the middle of the recent bear market to be thwarted at the moment of truth. See the one-year S&P 500 chart below.