Year-end Target (SPX) 4500
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Globally, 2023 should be a transitionary year where SPX enjoys a far better year than 2022.
Most weakness could be concentrated in Q2 before sharp rallies into Fall and a stairstepping rally into year-end. Increasingly, it’s right to expect that markets have made their
bear market bottoms last October 2022.
Two Possible Outcomes:
- Base Case- Equity markets turn up sharply in 1Q into mid-March, and pullbacks prove brief before further gains in a stair-stepping fashion to end the year up 15%. In this case, despite a mild late Spring bounce in US Dollar and Treasury yields, this proves short-lived, and no meaningful Equity weakness occurs and inflation falls off steadily all year. The US likely avoids recession in 2023 – YE target 4500
- Equity markets falter between March and June and then again in Fall 2023 before rally back into year-end- a choppier sideways year albeit with rally into year-end helping returns. Inflation stays with markets longer than expected given a sharp rally in Energy commodities and both TNX and DXY move back to highs, albeit briefly in 2023. In this case, it’s still likely SPX gains 5-10% but would be not as linear of a rally
Conclusions
- Equity markets likely to show a far better first half than many anticipate as historical Pre-election year tendencies look to be directly opposite Wall Street consensus
- Volatility likely could materialize from March-May and/or August-October, but 2023 as a whole should be higher by 15% as US stocks respect inflation falling more than the prospect of negative earnings revisions
- Energy’s dominance should continue this year, and could be joined by Materials and Industrials, with Technology showing most of its strength in 2H 2023
- Growth still under pressure vs. Value but could rebound in the back half of 2023
- Small caps have shown some initial signs of bottoming out and both Small and mid-caps might outperform Large caps in 2023
- Commodities and Emerging markets could outperform on falling US Dollar
- Treasury Yields and US Dollar should fall further in 1H 2023, but look to have a bounce which could take yields higher in 2Q-3Q before weakening into 2024
- Commodities outperformance should be led by Metals in 1H and Energy likely also shows a sharp rebound this year
- Cryptocurrencies should strengthen with stocks in 1Q 2023 before weakening into Summer. Best buying opportunities on weakness could materialize in May/June
Why Bear Market lows could likely be in place
- Momentum and trends remain positive short-term, and not overbought. SPX higher by over 500 points since 10/13 intra-day lows.
- Breadth expansion has been robust since October 2022 with >60% of SPX issues above their respective 200-day moving average (m.a.)
- Equal-weighted market gauges like Value Line have broken out above downtrends from Jan 2022 and SPX and NASDAQ could accomplish this by end of January
- Broad sector leadership has proven impressive, with Equal-weighted Materials, Industrials, Consumer Discretionary, all up more than 15 in % in the rolling 3-month period, outperforming SPX
- Technology shows evidence of breaking out of its intermediate-term downtrend, and this should help this sector play catch-up
Cycles bullish for 2023- Both cycle composites along with Pre-election year seasonality show a far better year for 2023 than 2022. - Sentiment still bearish – Despite sentiment having gradually improved in the last month, net Non-commercial S&P Futures positions remain negative and most Strategists have lackluster 2023 targets. Positioning remains very much defensive
- DeMark weekly exhaustion “13 Countdown” (Buy) are now in place for QQQ, AAPL, AMZN, MSFT and close for GOOGL
- US Dollar and Treasury yields have both turned down sharply, giving optimism that highs might be in place; Most cycles show these downtrends lasting through Q1
