Hooray for Folly-Wood

Feb 6, 2023

By Pete Biebel, Senior Vice President
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It’s hard to believe that anyone could have written a zanier script. The market’s blockbuster beginning of 2023 has seen last year’s stars merely playing bit parts, while the has-beens of 2022 have been cast in leading roles. And there have been Oscar-worthy performances from some players that had been left for dead. It’s a screenplay that drips with signs of excessive speculation. More on that later. The point is that the rally of early-2023 has shifted many investors’ fears of lower lows to fears of missing out on a new bull market. Which of those fears is well founded will likely be revealed in the next two or three weeks.

The stage is set. The build-up of the storyline is fast approaching the climactic resolution: Will the rally continue? Or will the façade of easy gains suddenly come crashing down? There are several suspicious aspects of the recent rally that may cause viewers to doubt its sustainability. The reason that I expect we’ll see some resolution of the dilemma in the near future is that the rally has lifted the major market indices to levels that are very near price ranges that would essentially negate the potential for a retest of the 2022 lows.

Playing the lead last week, the NASDAQ Composite Index (COMP) danced its way to a 3.31% gain for the week. And that was in spite of a 1.6% stumble on Friday. COMP increased its year-to-date advance to nearly 15%. In a supporting role, the S&P 500 Index (SPX) added 1.62% for the week despite a 1% loss on Friday and is now up nearly 8% for the year. The index that was the star of the group in 2022, the Dow Jones Industrial Average (DJIA), had a loss of 0.15% for the week, decreasing its year-to-date gain to a mere 2.35%.

Reprising the script from the prior week, all of the gain and most of the drama last week was packed into a very brief timeslot. The major averages were essentially flat through the first 2 ½ sessions of the week, but following the Fed announcement Wednesday afternoon, SPX rallied 3% in three hours from late Wednesday into the opening hour on Thursday. COMP gained 5% over that same stretch. As expected, the Fed hiked its benchmark rate by 25-basis points. The cue that sparked the market’s bullish act was a comment during the chairman’s press conference stating that inflation is coming down. The disinflation possibility raised hopes that the Fed might actually cut its target rate later in the year. A fine excuse for a rally. Late in the week, strong employment numbers (including the lowest Unemployment Rate in more than 50 years) and disappointing earnings reports from three of the mega-cap tech companies (AAPL, AMZN and GOOGL) led to some editing of that bullish sequence on Friday, leaving some of the midweek gains on the cutting room floor.

But the big bullish reaction to the chairman’s comments is part of what I see as the folly in recent market behavior. It should be noted that the chairman also reiterated that the central bank did not expect it would cut rates this year. That didn’t seem to matter. When the market is in a bullish mood, it celebrates good news and ignores negative headlines. Where the market seems to expect a soft landing for the economy and a Fed rate cut later in the year, it’s unlikely that the two events would unfold contemporaneously. You can’t have both. If the economy continues to chug along with no indication of a recession, then the Fed would have no reason to cut its benchmark interest rate. If the Fed does indeed lower its target rate later this year, then it will almost surely be because the economy is contracting, and the Fed feels that it needs to spur growth.

A second example of silliness in the market is that all of this year’s big gainers are last year’s big losers. That’s true at the broad index level, the sector level and the individual stock level. COMP lost more than 33% in 2022; it is now up about 15% in 2023. Conversely, DJIA declined a little less than 9% last year; yet despite a rip-roaring rally in COMP, DJIA is up less than 2.5% YTD. The four U.S. equity sectors that were the best performers last year (Energy +57.60%, Utilities -1.51%, Staples -3.32% and Healthcare -3.58%) are the four worst so far this year; they all have losses of between 1% and 3%. The four worst sectors last year (Communication Services -38.22%, Consumer Discretionary -36.82%, Real Estate -28.72% and Technology -28.43%) are the four best U.S. equity sectors YTD.

If the broad market and sector performance is a little silly, then the action in individual stocks might be described as gonzo. Of the 1010 stocks in the Russell 1000 Index, six of them are up more than 100% in the past five weeks. Yes, they have more than doubled since the beginning of the year. One, Carvana Co., is up more than 200% this year, from a 12/31/22 close at $4.74 to Friday’s close at $14.33. Just 18 months ago, that stock was trading around $360. Another example is Peloton Interactive Inc., which began 2023 with a 105% gain. Unfortunately, that was after the shares fell from $170 to $8 in the previous two years.

And there’s been similar silliness in what have come to be known as “the meme stocks.” These are the relatively tiny, near-bankrupt companies whose stocks initially spiked in the online trading frenzy a couple years ago. In an interview last week, hedge fund manager Jim Chanos pointed out that, as a group, each time the meme stocks have exhibited a sudden rush of bullishness, it has marked the end of the broad market’s rebound rally. That was true in both the March 2022 and the July/August 2022 rallies, and the group has recently spiked again. One meme stock that could be the posterchild for this phenomenon is Bed Bath & Beyond, the struggling home-goods retailer. On Thursday, the stock jumped 18% a day after the company missed making interest payments on its bonds.

If that’s not enough, consider that the performance of high-beta stocks has swamped that of the low volatility stocks over the past month or so. The ticker symbol SPHB tracks the 100 highest beta stocks in the S&P 500. Its counterpart, SPLV, tracks the 100 lowest volatility stocks. Since Dec. 28, SPHB is up almost 25% while SPLV is down 1.2%. The only other time in the past year that high beta so convincingly outperformed low volatility was in the July/August rebound rally last summer.

I mentioned earlier that the recent strength has lifted the major indices to very near price ranges that would essentially negate the need for a retest of the 2022 lows. With its gain last week, SPX has now recovered about 50% of its decline from the January 2022 high to its October low. If it can see sustained trading above the 4150 level, then follow-through gains to the area of the August highs near 4300 would be likely. While I still think that getting anywhere near the 4300 level is unlikely, clearing that level would strongly argue that the lows have been seen.

If nothing else, and despite its suspicious nature, the rally through the first five weeks of the year has created a comfortable barrier between current index levels and any danger levels on the downside. Unless and until SPX falls back below its 50-day and 200-day moving averages, both in the mid-3900s, the rebound rally should remain intact.

Earnings season continues this week, and while the week brings fewer announcements and no mega-cap stock reports, these announcements will likely be the bulk of the excitement for the week. Several Fed speaking engagements are on the calendar, but following last week’s fireworks, they’re likely to be duds. The economic report spotlight falls on the employment data on Thursday.

Date Report



Monday 2/6/2023 No Reports Scheduled
Tuesday 2/7/2023 International Trade, Trade Deficit, December



Consumer Credit, December, M/M



Wednesday 2/8/2023 Wholesale Inventories, December, M/M



Thursday 2/9/2023 Initial Jobless Claims



Continuing Claims



Friday 2/10/2023 Consumer Sentiment, February




Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market