About the author: Robert Zuccaro is founder and chief investment officer of Golden Eagle Strategies.
Bearish market sentiments are everywhere. Bank of America and Goldman Sachs are on record calling for new market lows in the first half of this year. Morgan Stanley has stated that stocks could slump another 20%. According to CNBC, 56% of millionaires think that the stock market will drop another 10% in 2023.
Many investors have built up sizable cash positions owing to fears about inflation, rising interest rates, and recession. However, for those investors who are on the sidelines, we think that it is time to jump back in with both feet.
1. French and German stock markets are near record highs. Without question, Russia’s war in Ukraine has caused turmoil in European economies due to diminished deliveries of Russian natural gas and oil. However, Europe transitioned away from Russian energy faster than expected. To date, the German DAX Index has rallied 29% off its low and is within 5% of its record high. France’s CAC 40 Index is up 23% from its low and is trading within 1% of its record high. Even the United Kingdom, where four-decade-high inflation has triggered labor unrest, is seeing higher stock prices. The London FTSE 100 Index hit an record high on Feb. 16.
2. The stock market has already discounted a small profits shortfall. Golden Eagle’s research shows that there tends to be a correlation between the magnitude of profits decline and index decline in bear markets. During 2008, the S&P 500 Index declined 39% while S&P profits dropped 40%. Last year, the S&P dropped 19% despite corporate profits increasing an estimated 6% last year. Therefore, we think that the 23% peak-to-trough decline by the S&P 500 Index from January through September has adequately discounted a possible profits shortfall in 2023.
3. The U.S. Federal Reserve has more room to raise interest rates. Despite periodic interruptions, the economy has steadily grown over the past half-century with long Treasury bonds yielding 7% on average over the past 50 years. Currently, long bonds are yielding 3.8% and 90-day T-bills 4.7%, so there is still room for the Fed to move rates higher before reaching a level that could throw the economy into reverse. Further, the consumer price index has receded from its peak of 9.1% in June to 6.4% in January. History tells us that the economy can grow with interest rates at current levels, and even at somewhat higher levels.
4. U.S. market averages are quietly advancing. The stock market surprised many investors with a strong start in January. The Dow index briefly moved into bull market territory on Jan. 13, marking a gain of 20% off its bottom. The NASDAQ Composite was up 11% and the S&P 500 Index gained 6%. Both indexes rallied further in early February.
Current economic forecasts predict recession in the first half of this year followed by a strengthening of the world economy in late 2023 or early 2024. The S&P 500 index is one of 10 leading indicators tracked monthly by the Conference Board. History shows that the S&P index typically leads the turn in the economy (up or down) by 3 to 11 months, which dovetails nicely with our case that a bull market has begun.
5. New highs now exceed new lows. Golden Eagle collects daily data on 52-week new highs and lows to stay abreast of stock market trends. On Jan. 12, 2022, the daily list of new lows started to dramatically outnumber new highs, which continued until year end. This indicator ran parallel to the market decline throughout last year. Thus far in 2023, the number of 52-week new highs has exceeded the number of new lows every day. Rarely if ever does the market go down when new highs are exceeding new lows.
6. This indicator signaled a new bull market. A bullish signal occurs when the S&P 500 50-day moving average crosses over the 200-day moving average. A bearish signal is indicated by a reverse movement of these two averages. The bearish signal referred to as the “death cross” took place in December 2021, before the start of the bear market on Jan. 3, 2022. Earlier this month, the 50-day crossed over into the 200-day, forming a “golden cross” which augurs for a higher stock market in the months ahead.
7. The January stock effect looks promising. The performance of the S&P 500 index in January often presages how the stock market will perform for the year. Since 1960, the direction of stock movements in January has correlated with the direction of the stock market for the entire year 70% of the time. The S&P 500 Index advanced 6% in January, implying that a good year for the stock market is likely in 2023.
Never before have we seen so many signals coalesce for a major stock market recovery. A major market recovery is likely underway.
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