Published January 13, 2023
Stocks have been moving higher. What began in Europe, spread to China, and is now beginning to show up elsewhere. Here are some charts displaying the shift in market tone in these areas. First up, a clear uptrend has formed over the past 3+ months in Europe. Fears of a natural gas shortage during the winter simply did not materialize.
Next up is China. Two major government actions have launched a rally in Chinese shares: 1) a relaxation of Covid restrictions, and 2) backing away from policies aimed at punishing technology companies. The market response has been sharp with the downtrend halted.
The potential improvement in fortune for China has led to a breakout this week in industrial metals. China is a huge consumer of commodities. The price of copper has broken upward and is the main driver of this move in industrial metals.
The story is gaining traction in the U.S. as well. This week saw the first breakout of a domestic market index, albeit a more obscure one. The chart below shows midcap value stocks hitting a NEW HIGH this week. The green line shows the Nasdaq 100 (QQQ). The difference in performance is striking and indicative of the shift in market focus away from the FANGMA high-growth stocks of the last market cycle and toward value stocks, which have not outperformed in a very long time.
Another factor behind these positive moves in the stock market has been the pullback in interest rates and, correspondingly, the U.S. dollar. Despite the Federal Reserve’s continued tough talk, investors have been pushing interest rates lower since the beginning of November as inflation data is clearly coming down now. The dollar has dropped to a key level as shown below. If it breaks down further, expect stocks to continue moving upward.
The broadening out of a rally is classic bullish action. If this continues, the bottom might well be in for the stock market. The narrative of a “soft landing” and shallow recession will become more prevalent with investor fear diminishing.
Last week, the monthly jobs report propelled stocks out of their tight three week trading range. Investors looked to build upon that move this week. Monday brought a day of consolidation. Stocks pushed higher Tuesday by +0.7% ahead of the monthly inflation report and the beginning of corporate earnings season at the end of the week. Stocks added to the gains Wednesday with a +1.3% advance ahead of Thursday’s inflation report. The report did not disappoint, showing overall inflation falling while meeting economist’s projections. Stocks ticked higher again, this time lifting +0.3% while oil prices notched a second day of gains. Stocks have done well so far in 2023 with the U.S. dollar coming down and a bit of risk tolerance returning to markets. Big banks kicked off earnings season with generally favorable results Friday. After selling off at the market open, buyers came in to bid bank shares higher. Adding to the positive feel, a consumer sentiment report showed the highest reading in nine months. The S&P 500 added +0.4% Friday with the Nasdaq 100 (QQQ) and Russell 2000 smallcap index rising for the sixth consecutive day.
Indexes rallied for a second week with the S&P 500 (SPY) closing the week up +2.69%, just below the closely-watched 4000 level. The Nasdaq 100 (QQQ) rose +4.53%. Smallcap stocks (IWM) gained +5.33%.
Warm wishes and until next week.