Stocks May Be Climbing, But Don’t Get Complacent

The S&P 500 finished 2022 down roughly 20%, flirting with a bear market. It was one of the worst trading years for the index since 2008, and a big difference from 2021 where the S&P 500 rallied nearly 27%.

It’s been a different story, so far, in 2023, with the S&P 500 gaining 6.2% in January, marking its best January in four years. The Nasdaq Composite climbed 10.7% for its best January since 2001 and best monthly performance since July 2022.

A strong start to the year is a positive sign for the market and, potentially, the coming quarters. Of the five times when the S&P 500 gained more than five percent in January after a negative year, the benchmark index rose, on average, 30% for the year.

This may have buoyed investor optimism, but there has to be a reason for stocks to climb that much. And right now, there isn’t any. Investors are hopeful that inflation is coming down, interest rate hikes will pivot, and the U.S. economy will avoid a recession.

Inflation has cooled, but red hot January jobs data in the U.S., which saw the U.S. economy add a whopping 517,000 jobs—more than double the expected 185,000 jobs—shows more work needs to be done to tame inflation. That means more interest rate hikes.

Additional interest rate hikes could tip the U.S. and Canadian economies into recessions, which would certainly undermine already soft corporate earnings.

This is why leading market strategists like David Rosenberg, the former chief North American economist at Merrill Lynch, believes the S&P 500 could bottom out somewhere near 2,900, which is 30% below current levels. He also said investors shouldn’t expect to turn bullish until 2024.

Stocks are certainly rallying, but by all accounts, it’s not the start of a long-term bull market, but just another bear market rally. There just isn’t enough signs of strengthening economic fundamentals to support the bullish sentiment. As a result, the disconnect between the stock market rally and market fundamentals suggests we could indeed see stocks experience a big pull back over the coming months and quarters.  

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Stocks kicked off 2023 with one of their best starts in years. Despite the big year-to-date gains and growing optimism, investors shouldn’t get complacent. There’s more reasons for stocks to fall over the coming months than continue to climb. Regardless of what the stock market does, the trading experts at Learn-To-Trade.com can help investors trade more confidently when stocks are going up, down, or sideways.

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