Indications Of A Major Stock Market Recovery Looms Ahead

There are a lot of bearish market sentiments all over the place right now. Goldman Sachs and Bank of America have both called for new market lows in the first half of the year, according to records. Stocks are expected to drop another 20% in the next few months, according to Morgan Stanley. It seems that 56% of millionaires believe that the stock market will drop another 10% in 2023, according to the latest report from Trade Algo.

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Due to inflation fears, rising interest rates, and fears of a recession, many investors have built up a considerable amount of cash in their portfolios. For those investors who are on the sidelines, however, we think that it is time that they jump back into the market with both feet in order to reap the benefits.

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1. Stock markets in France and Germany are near record highs. Due to diminished deliveries of Russian natural gas and oil, Russia's war in Ukraine has caused turmoil in European economies. In spite of this, Europe transitioned away from Russian energy faster than expected. The German DAX Index is within 5% of its record high after rallying 29% from its low. The CAC 40 Index in France is trading within 1% of its record high, up 23% from its low. It is even seeing higher stock prices in the United Kingdom, where four-decade-high inflation has sparked labor unrest. A record high was set by the London FTSE 100 Index on Feb. 16.

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2. A small shortfall in profits has already been discounted by the stock market. It has been found by Golden Eagle's research that there tends to be a correlation between the magnitude of profits decline and the magnitude of index decline in bear markets. There was a 39% decline in the S&P 500 Index during 2008, but a 40% drop in S&P profits during the same period. The S&P 500 dropped 19% last year despite corporate profits rising by an estimated 6% in the same period. In light of this, we believe that the 23% peak-to-trough decline in the S&P 500 Index from January through September has sufficiently discounted the possibility of a profit shortfall in 2023 as a consequence of this decline.

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3. The U.S. Federal Reserve has more scope for raising interest rates in the future. Despite periodic interruptions, the economy has steadily grown over the past half-century with long Treasury bonds yielding an average of 7% over that period, despite periodic interruptions. It is currently estimated that long bonds are yielding 3.8% and 90-day T-bills are yielding 4.7%, so there is still some room for the Fed to move rates higher before the economy is thrown into reverse by the level of rates. In addition, the consumer price index has receded from its high of 9.1% in June to a low of 6.4% in January, which indicates a drop in inflation. In the past, we have seen that an economy can grow with interest rates at their current levels, and even at rates that are slightly higher than those they are currently at. 

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4. The U.S. market averages are quietly rising. Investors were surprised by the strong start to the year in the stock market. As a result of a 20% gain from its bottom, the Dow briefly entered bull market territory on Jan. 13. A 11% gain was recorded on the NASDAQ Composite, and a 6% gain was recorded on the S&P 500 Index. In early February, both indexes continued to rise.

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As of now, economic forecasts predict that the world economy will enter a recession in the first half of this year, followed by an economic recovery in the second half of 2023 or early 2024. A leading indicator tracked by the Conference Board on a monthly basis is the S&P 500 index, which is one of the ten leading indicators. There is a history that shows that the S&P index tends to lead the turn in the economy (up or down) by 3 to 11 months, which is in line with our case that the bull market is underway.

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5. The number of new highs now exceeds the number of new lows. In order to stay on top of stock market trends, Golden Eagle collects daily data on 52-week highs and lows. After Jan. 12, 2022, new lows began to outnumber new highs on a daily basis, and this trend continued until the end of the year. The decline in this indicator coincided with the decline in the market last year. There have been more 52-week highs than 52-week lows every day so far in 2023. When new highs exceed new lows, the market rarely falls.

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6. A new bull market was signaled by this indicator. When the 50-day moving average of the S&P 500 crosses over the 200-day moving average, it is considered a bullish signal. When these two averages move in the opposite direction, this is considered to be a bearish signal. A bearish signal referred to as the "death cross" occurred in December 2021, before the start of the bear market on Jan. 3, 2022, which is when the bear market officially began. As the 50-day chart crossed over into the 200-day chart earlier this month, we are likely to see a higher stock market in the months to come as a result of this golden cross. 

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7. There seems to be a positive impact on the January stock market. The performance of the S&P 500 index in January often predicts the performance of the stock market for the year. 70 percent of the time, the direction of stock movements in January correlates with the direction of the entire year's stock market. In January, the S&P 500 Index rose 6%, suggesting that 2023 will be a good year for stocks.

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It has never been so clear that a major stock market recovery is on the horizon. Markets are likely to recover significantly.

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