March 3, 2023
Good morning,
The market’s pause continues. The S&P 500 Index (SPX) closed yesterday +.28% above last Friday’s close. Unfortunately, that is not enough of a buffer to assume we’ll get an up week on the SPX this week. This week does follow three down weeks in a row, so the bulls could use it. Except for a spike up to 4.09% on the U.S. 10yr Treasury, (it’s back to 4.0% this morning) bonds are largely unchanged so far this week too. Due to an unusual calendar pattern – short month, followed by an early Friday – this month’s first Friday (today) does not have an employment report. That Fed key-data point does not come out until next Friday, with no other key-data between now and then. Hence the vacuum of data mentioned last week and the likelihood of a quiet market this week and next.
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An unusually quiet first Friday seems like a good time to step back from the short-term action of the market and look out in broader terms. Coming into the year, the dominant fear for the markets was that the economy was tracking toward recession. A string of stronger-than-expected economic data removed the immediate threat. The result was the second-best January for the S&P 500 in the past 34 years. The rally brought bears off the sidelines, if reluctantly, and short-term sentiment indicators reached their bullish extremes.
Both the economic data and stock market gains proved to be too much of a good thing. The Fed having to hike sooner and keep rates higher for longer than expected replaced risk-on with risk-off. Stocks pulled back, with the S&P 500 declining 2.6% in February. The index has given back roughly one-third of its gains from the October lows. While the market trend has turned up, the rally that started at the October lows thus far, has fallen short of a cyclical bull market status by any definition. With another round of economic data potentially showing a resilient economy and rebounding inflation, an updated dot plot at the March 21-22 FOMC meeting, and Q1 earnings preannouncement season on the horizon, March offers a good opportunity for the bears to regain control.
The big question for markets right now is, “Was February a correction in a developing cyclical bull market or was it the beginning of the resumption of last year’s bear market?” As presented in recent Morning Notes, the technical data leans not overwhelmingly toward the former. The pullback that began in February thus far has relieved optimism but caused minimal technical damage. If further market weakness continues to dampen spirits (improving sentiment) with little technical damage, it would be a sign that the rally could continue into mid-year.
Have a good weekend.
Be well,
Mike