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. In recent weeks, the stock market has reached the same half-way-point threshold that spelled doom for bulls in August of 2022, leading many to question the sustainability of the current rally.
Additionally, the year’s first big blow to the dip-buying strategy, warnings from bonds, and disenchantment among hedge funds are contributing to a growing sense of unease among investors.
The Half-Way-Point Threshold Spell Doom for Bulls
The S&P 500’s recovery reached the same half-way-point threshold that spelled doom for bulls in August of 2022. This signals that the bulls may be in for a rough ride in the coming weeks and calls into question the sustainability of the current stock market rally.
The First Big Blow to Dip-Buying Strategy
The dip-buying strategy, which involves buying stocks during market downturns, has been one of the strongest in decades. However, this year has seen the first significant blow to this strategy, leading to warnings for those who have relied on it to make investments. The dip-buying strategy has been a key factor in propping up the stock market, and its failure could signal a more significant downturn.
Read More: Clock Is Ticking Louder on a Stock Rally the Pros Never Believed In
Warnings from Bonds
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. The bond market is often seen as a barometer of market sentiment, and its recent negative signals are a cause for concern among investors.
Disenchantment Among Hedge Funds
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. This decline in the stock market, combined with the trimming of positions by hedge funds, signals a growing sense of unease among investors.
The Riskiness of the Run-up in Equity Prices
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 High by Historical Standards
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. The current valuations of equities are at levels not seen since before the financial crisis of 2008, and many experts are warning of a potential market correction.
Betting Against the Pundit Class
Betting against the pundit class, which is united in its view that stocks are due for a reckoning, is a risky move. The pundit class, made up of market analysts and economists, has a wealth of knowledge and expertise, and their views should be taken seriously.
The Impact of Rate Hikes on the Economy
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.
The impact of rate The stock market has seen a rally in recent months, but some experts are starting to raise red flags about its sustainability. The S&P 500's recovery has reached a half-way-point threshold that, in the past, has signaled trouble for bulls. This comes on the heels of the year's first big blow to a dip-buying strategy, which has been as strong as any year since 1928 by one measure.
In addition to these concerns, warnings are being sounded from bonds, which had previously been seen as providing a bullish signal to equity investors. This belief has now been shaken, as the bonds are not providing the cover they once were. Another sign of trouble came from hedge funds, which trimmed their positions in a way not seen for two years, according to data from Goldman Sachs Group Inc. The S&P 500 saw a 1.1% drop in the past five days, marking its worst week since mid-December.
While one bad stretch in the market does not necessarily prove anything, it does highlight the riskiness of the current run-up in equity prices. The equity prices have inflated by $5 trillion at a time when central bankers are warning that their inflation-fighting campaign may have years to go, and data on earnings and the economy continue to be poor.
Investing in stocks at this time means betting on high valuations that are well above historical standards, and going against a pundit class that is more united than ever in the belief that a reckoning is due.
"The first half of the year is likely to show the impact of rate hikes that began all the way back in early 2022, that are finally feeding through the economy," says Tom Hainlin, National Investment Strategist at US Bank Wealth Management. "We would not have a lot of confidence that this rally that we’ve seen in early 2023 is sustainable until we see the impact of rate hikes on the real economy."
In conclusion, the clock is ticking on the stock rally, and the experts are warning of its potential for danger. The half-way-point threshold, the first big blow to dip-buying strategy, warnings from bonds, and disenchantment among hedge funds all point to potential trouble ahead. The riskiness of the run-up in equity prices, combined with high valuations and a united pundit class, means that investing in stocks at this time requires a certain level of risk tolerance. The impact of rate hikes on the real economy will be key in determining the rally's sustainability, and investors should proceed with caution until more information is available.