December 19, 2022
Good morning,
With the major market events of the month now largely behind us, expect financial markets to now shift into holiday mode. Let’s give the current rally the benefit of the doubt and a chance to muster a reasonably common Santa Claus rally over the next two weeks. However, I’m beginning to lose confidence that the best rally this year, now 2 months old and still up +10% from the October lows, is not ultimately another bear market rally like the rest. If so, the October lows will likely be revisited.
Ned Davis Research (NDR) conducted its 2023 Outlook webinar last week. They are still carrying a 75% chance of a recession, and they think inflation has peaked but will be higher for longer vs. the Fed’s stated long-term targets. They see the S&P 500 at 4300 at the end of 2023 (calculated in early Dec with the S&P 500 at 4000), 8% higher over the course of the year.
Like most strategists, NDR observed that the depth of any recession will likely be the main driver for markets in 2023, assuming no more unknown unknowns show up in the next year (natural disasters, war, another pandemic). In all of their charts in last week’s 90min presentation one of them stood out to me more than all the others.
Bear markets have never ended before the start of recessions, so a recession would likely mean new lows in the popular averages. The stock market tends to lead the economy out of a recession, too, by an average of four months. Absent a financial crisis, the recession should be shorter than recent cases. The orange line in the chart at right shows the average performance of the S&P 500 nine months before the end of a recession bear to three months after, which would align with a 9/30/2023 recession end date. The average recession bear decline is 34.6%, but a milder recession could equate to a smaller-than-average drop. To date, the 2022 decline is in line with the average non-recession bear. If the Fed achieves a soft landing (blue line), 2023 could cover months 3-15 of a post non-recession bull. -NDR
The most interesting point on this chart is that the theoretical recession path ends next year less than 4 percentage points behind the non-recession path. Far less than I, and I think many would expect.
The Morning Note will go into Holiday Mode today as well. In the meantime, best wishes to you and your families for a very Merry Christmas and Happy Hanukkah. Enjoy!
Be well,
Mike