The stock market rally that has been seeing positive momentum in early 2023 may be at risk as various factors point towards an impending market correction. The half-way-point threshold that was seen in August of 2022, where the S&P 500's recovery reached a peak and declined, has now been reached again. This signals that the bulls may be in for a rough ride in the coming weeks.
The dip-buying strategy, which involves buying stocks during market downturns, has been one of the strongest in decades, but it received its first significant blow this year. This is a warning sign for those who have relied on this strategy to make investments.
Warnings are also coming from the bond market, whose bullish thrust had previously given investors confidence in equities. However, the bond market is now pointing towards a possible market correction, causing concern among equity investors.
Disenchantment is also evident among hedge funds, with the biggest trimming of positions seen in two years, according to data from Goldman Sachs Group Inc. The S&P 500 dropped 1.1% in the past five days, marking the worst week since mid-December.
The run-up in equity prices, which has inflated equity prices by $5 trillion, is a significant cause for concern. With central bankers stating that their inflation-fighting campaign may have years to go, and with earnings and economic data continuing to decline, buying stocks now is a risky proposition.
Valuations are high by most historical standards, and betting against the pundit class, which is united in its view that stocks are due for a correction, is a risky move.
Tom Hainlin, national investment strategist at US Bank Wealth Management, states that the impact of rate hikes that began in early 2022 is likely to show in the first half of 2023. He adds that there would not be a lot of confidence in the sustainability of this rally until the impact of rate hikes on the real economy can be seen.
In conclusion, while one bad stretch in the market does not prove anything, the signs of a possible correction are becoming increasingly apparent. It is essential to exercise caution and be mindful of the risks involved in investing in equities at this time.