3 reasons why the current stock market rally of 2023 could stall

The surprising stock market rally of 2023 may be due for a punch to the gut.

“While we were looking forward to a market rebound from Q4 of last year, and believe that initially Q1 will stay robust, given what was light positioning and supportive seasonals, we do not expect that there will be a fundamental confirmation for the next leg higher, and see rally fading as we move through this quarter, with Q1 possibly marking the high for the year,” warned influential JP Morgan strategist Mislav Matejka in a note to clients.

Matejka served up three reasons for the caution.

First, the yield curve is staying inverted, and investors shouldn’t ignore the signal’s track record. When the yield curve inverts, it reflects long-term interest rates falling below short-term rates. The move is indicative of investors putting more money to work in longer dated bonds amid fear of near-term economic prospects.

Fear an inverted yield curve?

Second, according to Matejka, money supply continues to move lower in the both the U.S. and Europe as interest rates remain on an upward trajectory.

And lastly is that bank lending standards have been tightening, leading to slower demand for credit and usually serving as a precursor to recessions.

“We do not see recession as off the table now, and believe the rally will fade as we move through Q1,” Matejka wrote. “Recession view is being priced out… however, key monetary signals are all sending warnings signs.”

A woman walks by Caution Falling Ice sign in downtown Chicago, Illinois, on January 26, 2021. (Photo by KAMIL KRZACZYNSKI/AFP via Getty Images)

Thus far in 2023, markets have ignored all of these macro warning signals. Investors have also overlooked a borderline dreadful earnings season.

The blended earnings decline for the fourth quarter for the S&P 500 is tracking at 4.7% according to Factset. If this drop holds, it will mark the first year on year profit decline for the S&P 500 since the third quarter of 2020.

Yet, here we are with solid returns in markets year to date.

The Nasdaq Composite has churned out a 12.6% gain year-to-date on the back…

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