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Tom Hutchinson

From this author
This is a big week in the market. Investors are grappling with the fallout from the banking crisis and the Fed meeting later this week.

The failure of two banks last week also turns a spotlight on the vulnerabilities of smaller regional banks. The situation so far has not caused major reverberations in the market, as the government backstopped the fallout so far. But the situation might not be over. There could be more bank failures and ugly days for the market ahead.
We were rolling along in a choppy market to nowhere as the sticky inflation/hawkish Fed conundrum promised to play out for longer than hoped at the beginning of the year. But over the past several days a Black Swan event popped up, the failure of Silicon Valley Bank.
The market had a great start to the year and then slumped in February. March started off with the best week in a month for the S&P 500. What’s next?

There will be a lot of information coming out this month that could determine whether the market rallies or slumps from here. This week, the Fed speaks and the February jobs report comes out. These events could give investors a better idea of how aggressive the Fed will remain.
Last week marked the fourth straight week of declines for the S&P 500 and was the worst week so far this year, down nearly 3%.

The problem is inflation, go figure. The Federal Reserve’s preferred measure of inflation, the Personal Expenditures Price Index (PCE), was much higher than expected in January and showed inflation moving higher, not lower, to start the year.
Stocks are bracing for the January inflation report, which comes out today. The number could determine the next thrust of the market.

It’s been a good year so far for stocks, despite the slight pullback last week, as investors embrace the notion of falling inflation and a Fed that will finish raising interest rates around midyear. But a bad inflation report could put the kibosh on that optimism and send stocks reeling.
The market is making some noise so far this year. And in a good way. The S&P 500 is 7.7% higher and the Nasdaq is up 14.7% YTD. Is this real, or just another head fake?

The rally is being prompted by increasing optimism of a soft landing, where inflation falls without the economy falling into recession. Previously pessimistic pundits are now embracing the possibility. And there is some evidence to back up the soft-landing scenario.
The year has certainly started out in fine fashion. The S&P 500 has delivered positive returns for all four weeks so far this year. The S&P is up 6% YTD and the Nasdaq is up 11% YTD, as of Friday’s close.

But earnings have been lousy so far this quarter, with the average S&P 500 company that has reported so far posting -5% earnings growth from last year’s quarter. But the market was expecting that. Investors know there will be a declining economy this year, and the sooner it declines, the sooner the Fed will be done hiking rates.
It been a good start to the year, with the S&P 500 up over 4%. There is optimism that the Fed will lose its hawkish nerve as inflation falls and the economy turns south. Inflation was lower again in December, with CPI of 6.6% versus 7.1% in November and 9.1% in June. At the same time the economy is weakening, and most economists are predicting recession this year. Since markets tend to anticipate six to nine months into the future, it might not be that long until investors start sniffing out the end of the inflation/Fed conundrum and past the recession into a recovery.
So far, I like 2023 a whole lot better than last year. At midday on Monday, the S&P 500 is up 3.7% and the Nasdaq is 4.5% higher so far this year. And it hasn’t even been five full trading days yet. Later this week, the December CPI number will come out, on Thursday. CPI is expected to be 6.6%, versus 7.1% in November. Assuming the number comes in at or better than expected, it could be very positive for the market. Falling inflation means the Fed won’t have to be as aggressive and investors could start sniffing out an end to this inflation/Fed conundrum later in the year.
This year begins in 2022 form, lower. Although the calendar changed, the issues that have pressured stocks lower over the past month remain. There is still great uncertainty regarding inflation, the Fed, and a recession.
It’s really the holiday season now. This time of year, investors stop paying attention to the market, like during the last days of the summer. That means, in the absence of game-changing headlines, stocks probably won’t do much of anything until the rubber hits the road after New Year’s.

When sobered up investors take a fresh look at stocks in January what will they see? They’ll see what they saw before they stopped paying attention, a lot of uncertainty.
After good news on inflation, the market awaits the Fed’s rate decision and comments later today. It could lead to a rally or a fizzle.

Inflation for November was less than expected with CPI at 7.1% versus an expected 7.3% and core inflation at 6.0% versus an expected 6.1%. It’s welcome news that inflation is moving lower and has probably peaked, down from 9.1% in June. But it’s still a long way from the 2% Fed target.
It’s been a rough week so far as investors are severely disappointed over the good economic news.

Strong jobs growth and continuing strength in pockets of the economy is spoiling recent investor optimism. Economic strength is not what the Fed wants to see in its battle against inflation. Strength in the economy indicates that perhaps the Fed will have to remain aggressive for longer to slow down the economy and snuff out inflation.
The rally sputtered. But it hasn’t reversed. That’s because there are reasons for both optimism and caution.

There is a growing perception that the problems responsible for this bear market have peaked. Inflation has been receding and the Fed might be less aggressive going forward. The market tends to anticipate six to nine months into the future, and it sees lower inflation and the Fed done hiking rates.
It’s a furious rally. The market is on fire. Last week’s inflation report ignited a surge that might last longer. Let the good times roll (for now).

October inflation numbers were reported last week and both top-line CPI and core inflation numbers were lower than expected. It reignited hope among investors that inflation has peaked and is on the decline and the Fed will stop raising rates sooner than previously expected.
It’s been a tough market for covered calls. Although the market has rallied off the low, call premiums are subdued because investors are less willing to bet on higher prices in the future with still high inflation, a hawkish Fed, and a looming recession.

Many of the more successful positions were called away at options expiration as they exceeded the strike price. But in hindsight it was beneficial to take those profits as well as generate a high income. Many of the remaining portfolio positions left are more cyclical stocks that have fallen below the purchase price. Several more defensive positions have since been added to the portfolio.
It was a strong October in the market with the S&P 500 up more than 6% for the month. But the index was up over 8% in the second half of the month after recovering from the low.

What’s going on, and can it last?

Part of this rally is a bounce off the low, which is normal for bear markets and has already occurred several times this year. But there are glimmers of hope that the market may have already bottomed. That hope is largely predicated on the notion that we may be at the peak of the Fed’s aggressiveness. All eyes will be on the Fed this week for confirmation.
The market has been rallying furiously over the past several days on earnings. Is this the Promised Land or more false hope?

It’s just the kickoff of the third-quarter earnings season and the nation’s major banks have reported. These banks are considered bellwethers for the U.S. economy and numbers are better than expected. The results are reviving hope among investors.