Golden Cross on 2 – 2- 2023
Last Week:
Last week the markets gave back some of January’s strong returns. This is normal behavior as the beginning of February is normally a time of give back and a consolidation period after strong January returns. The indexes finished the week with their worst week for 2023, with technology, communication services, and small caps dragging down the indexes.
For the week, the Dow dropped -2%.; the S&P 500 fell -1.1%; and the tech heavy Nasdaq dropped -2.4%. Communication services dropped the most, falling -6.6%, followed by a -2.2% drop in consumer discretionary, a -2% decline in real estate and a -1.7% drop in stocks. Energy was the only green group rising +5%.
Last week yields rose from 19-20 bps on 10- and 30-year bonds to 26 bps for 5-year Treasuries. However, while nominal interest rates rose, real interest rates fell. The U.S. dollar rose 0.3% last week. Hawkish Federal Reserve comments caused markets to price in a higher terminal rate and lowered some expectations of easing in 2023. Markets now expect a Fed funds rate of 5.00-5.25%, peaking this summer, with only one rate cut priced in late 2023.
Year to date the S&P500 remains up +6.5% with 2022 laggards leading 2023 returns. The Advance-Decline line remains near its recent recovery high which is longer-term bullish. However, decliners outnumbered advancing issues by a 3-to-1 ratio on the NYSE and a 5-to-1 ratio on the Nasdaq last week.
Financial conditions have eased since October, despite continued Fed tightening. Credit spreads have narrowed meaningfully, the S&P500 has risen about +15%, mortgage rates are down helping out housing demand, and crypto and the meme stocks have been awakened. This is mostly due to a peak in “real interest” rates which few analysts follow.
With earnings season wrapping up, 4th quarter 2022 S&P500 earnings are tracking as forecast, though the composition of earnings is different than expected. Revenues came in stronger than analyst estimates, but operating margins of 14.7% were materially underperforming pre-season expectations of 15.3.
Per FactSet data, 69% of S&P500 companies have reported positive EPS surprises and 63% have reported revenue beats. Aggregate earnings declined -4.9% for the S&P500 which makes it the first YTY decline since the 3rd quarter of 2020. Looking backward at the data, 3rd quarter of 2020 would have been a pretty good time to invest in the overall markets.
Later this week, the economic calendar is full with the January reports on the CPI on Tuesday being the market’s main focus. Additionally, retail sales and industrial production
get reported on Wednesday, and housing starts, and building permits wrap up the week on Friday.
Per Merrill Lynch, on Thursday 2/2/2023, the S&P 500 cash index triggered its 49th golden cross since 1928. SPX returns after a golden cross are historically strong 30, 65 and 195 days after the signal with the index up 75% of the time. S&P500 golden crosses have been Money” when they are associated with recessions. The US has had 15 economic recessions going back to the late 1920s.
The S&P500 has generated 14 golden crosses associated with 13 out of these 15 recessions with the 1929-1933 recession seeing two golden crosses. Recession golden crosses indicate an improving equity market during periods of economic stress. The best returns have been 195 days after the signal. The S&P500 has been up 92.9% of the time with an average return of 22.0% (22.0% median) in 195 days. 260 days after the signal, the markets were also up 92.9% of the time with an average return of 21.9% (18.4% median) 260 days after the signal. (Data per Merrill Lynch Global Research).
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