Stocks traded within a narrow range over the holidays and saw a strong rally last Friday, boosted by a positive jobs report. Is it possible that some optimism is creeping into investor sentiment after an emotionally draining 2022?
The jobs report was somewhat of a Goldilocks scenario in which wage growth and job openings weren’t too strong to increase inflation or too weak to indicate a recession is near. It’s curious with all the fears of a forecasted recession in 2023 that unemployment is at a historic low of 3.5%. Low unemployment and a continued strong economy could allow the Federal Reserve to continue to increase interest rates and reduce inflation without forcing a recession, and I believe this scenario can occur in 2023. I also believe investors were hyper focused on the negative impact of rising interest rates in 2022 without holistically looking at the overall strong economy and its ability to withstand higher interest rates (like I discussed in the January Newsletter here < https://www.barnaiassetmanagement.com/blog/will-higher-interest-rates-be-bad-for-the-economy-in-2023-and-beyond>).
I’m looking ahead to the important monthly inflation report which comes out on Thursday as well as the start of fourth quarter earnings reports next week. Positive data from these events may support a more optimistic economic forecast and rising stock market prices. There are a number of reasons 2023 has a good chance of positive stock market returns – 3rd year of the presidential cycle, a politically split congress and executive branch, mean reversion (stock returns revert to long-term average of +10% per year), and negative investor sentiment (negative sentiment is highest at and following stock market bottoms). Anything can happen this year and nothing is guaranteed, but there are some powerful tailwinds to support higher stock prices.
I’m currently conducting my yearly comprehensive stock market analysis and look forward to sharing my findings in future newsletters and during our annual review meetings in March.
Photograph by: Moritz Knöringer on Unsplash
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