Stock market strategists say there’s a good chance for a Santa Claus rally next month, but the market may not hand out many goodies to investors in the first part of next year. Some strategists see a bottom for equities in the first part of 2023, but others say key indices could avoid falling to new lows but remain volatile. The S&P 500 rallied above 4,000 on Tuesday and was holding above that level on Wednesday. Its recent intraday low of 3,491.58 was set on October 13th. “Most strategists are asking for 4,100, 4,150. But they’re also asking for new lows in the first quarter,” said Scott Redler, Chief Strategy Officer of T3Live.com. Redler tracks short-term technicals, and he said the market could experience weakness around first-quarter earnings, following a Santa Claus rally in the fourth quarter. “I think the Fed stops raising rates in the first quarter, but they have to leave them there for a whole year. That’s why next year could be so bad for equities,” he said. . The Federal Reserve is expected to raise its target federal funds rate by half a point in December and raise it again until it hits 5%. “Until things break, they have to keep it up there,” Redler said. He said one thing that could break would be if there was a big stock market selloff that involved the central bank. The federal funds rate range is currently 3.75% to 4%. Recession alert? Sam Stovall, chief investment strategist at CFRA Research, said there is a high level of uncertainty about whether a recession is coming in the first part of 2023. For this reason, the outlook for equities does not are also unclear. “I don’t know. That’s the concern I have,” he said. “I think the Fed is going to end its rate-tightening policy pretty soon… in the first quarter of next year. I think the Fed could end up cutting rates by the end of the year. But with the yield spread being as wide as it is, it tells you that a recession is coming, and I wonder if the market is correctly predicting a recession.” Stovall was referring to the steep inversion of the Treasury yield curve, which means that short-term rates, like the 2-year Treasury yield, are well above long-term, like the 10-year. This is considered a recession warning. With the 10-year at around 3.73% on Wednesday, this so-called reversal was over 75 basis points. One basis point is equal to 0.01 percentage point. Bank of America strategists cite this reversal and expectations of a mild recession next year as the reason for their negative call for equities for the first half. “We remain bearish risk assets in the first half, likely turning bullish in the second half; the market narrative shifts from inflation and rates ‘shocks’ of 22 to recession and credit ‘shocks’ in the first half of 23,” they wrote in a note. Then, they expect the bullish spikes in inflation, fed funds, bond yields and the dollar to take hold in the second half of the year and potentially trigger a new bull market. Finding a strategy to survive Stovall said the earnings outlook is already negative. He said analysts expected fourth-quarter S&P 500 earnings to decline, followed by choppier weakness in the first half, then higher growth in the second half. I/B/E/S data from Refinitiv predicts a 0.4% decline in S&P 500 earnings in the fourth quarter. “We are concerned in terms of earnings, but it’s not like the double-digit declines we saw in 2020 or 2008, when they were down 32% year-over-year,” Stovall said. Stovall said there hasn’t been a big selling crescendo in the current bear market. “We didn’t get the capitulation that we normally get in bear markets. However, we could avoid that capitulation if that bear market is only 25%,” he said. “If it ends up going deeper, we’ll get that capitulation.” Stovall said investors needed to find a strategy to get through the first half. Cost averaging, for example, involves investing a set amount of money at regular intervals over time, regardless of prices. “Because the first half is so uncertain, it’s probably a better time to average the dollar cost. An average first half of the dollar cost with a recovery expected in the second half,” he said.
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