Setup for stocks favorable for April... inflation cooling = aiding dovish Fed. Rule of 1st 5 days implies S&P 500 >4,275 by end of April.

At the start of 2023, Street consensus was bearish on equities, both sellside and investors. We have written about the unusual bearishness of Street in 2023, so we will not cover this ground again. But as we noted in our 2023 Outlook (early Dec), we wrote how probabilities favored S&P 500 gaining >20% (>4,750 by YE) with multiple factors driving this view.

  • at start of April, S&P 500 up +7%, the strongest start since 2019
  • S&P 500 posted two consecutive quarterly gains, which has NEVER happened in a bear market (since 1950), meaning 1Q23 gains validate a bull market started on Oct 12, 2022. S&P 500 has been rising for 6 months and investors are more bearish now than they were in October 2022.
  • Bears are increasingly trapped as fundamental catalysts for stocks to decline have passed and equities have shown impressive resilience. The negative catalysts were:
    - inflation was supposed to accelerate in 2023, but it is now cooling sharply
    - EPS estimates were supposed to tank, but have been leveling off
    - regional banking crisis was supposed to tank economy, but it is leveling off too
    - Fed was supposed to become more "hawkish" but instead made a "dovish" hike
    - long-term yields were supposed to soar, but have fallen consistently since Feb
  • In other words, bearish catalysts have come and gone and S&P 500 is up +7% YTD.
  • What about April? We expect April to be the strongest month in 2023, mainly relying on the implied gains using our "Rule of 1st 5 days." The Rule of 1st 5 days looks at years when S&P 500 gains >1.4% in 1st 5 days and is negative the prior year. This has happened 7 times since 1950: 1958, 1963, 1967, 1975, 2003, 2012 and 2019.
  • Based upon those 7 years, April implied gain is +4.2% and was positive 6 of 7 times (only 2012, -0.7%). This mplies +175 points, or S&P 500 >4,275 by the end of April.
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