As
2023
dawned,
the
market
setup
looked
sharply
askew
in
a
negative
direction,
in
terms
of
recent
performance
and
investor
expectations.
The
S
&
P
500
had
just
sustained
its
worst
calendar-year
loss
in
half
a
generation.
Professional
economists
as
a
group
projected
record-high
odds
of
recession
as
of
Dec.
31.
Investors
were
racing
into
cash-equivalent
vehicles
which
offered
the
enticing
novelty
of
5%
yields.
Those
playing
in
stocks
overwhelmingly
favored
the
defensive
sort,
with
a
crowded
consensus
believing
the
old
favorites
of
Big
Tech
would
remain
out
of
favor.
It
presented
a
rather
clear
chance
for
an
assertive
contrarian
approach
—
perhaps
emboldened
by
the
strong
rebound
rally
off
October’s
bear-market
low
—
to
reach
for
the
most-punished,
aggressive
stocks
while
betting
that
the
economy
could
hold
up
even
as
the
Federal
Reserve
gradually
lifted
interest
rates
toward
its
yet-unknown
ultimate
destination.
As
noted
here
in
January
,
such
a
case
was
taking
shape,
though
it
appeared
a
highly
contingent
and
fragile
one
in
need
of
further
confirmation.
Yet
after
a
near-15%
total
return
for
the
S
&
P
500
so
far
this
year
led
resoundingly
by
those
old
Nasdaq
favorites,
a
swing
toward
greater
bullishness
by
investors,
a
wider
adoption
of
the
“soft
landing”
economic
scenario
and
a
Fed
in
a
data-dependent
holding
pattern,
the
market
is
on
more
even
footing
and
the
risk-reward
tradeoff
into
the
second
half
is
a
closer
call.
Textbook
consolidation
Last
week’s
modest
1.4%
decline
in
the
S
&
P
500
did
little
to
alter
either
the
favorable
underlying
market
trend
or
the
notion
that
more
consolidation
might
be
in
store.
The
action
was
textbook
in
several
ways,
the
indexes
hotly
overbought
coming
into
the
June
16
monthly
options
expiration,
the
week
following
the
June
expiration
historically
weak
and
sentiment
and
investor
positioning
having
migrated
toward
more
optimism
and
risk
seeking.
The
long-running
weekly
Investors
Intelligence
survey
of
professional
market-advisory
services
has
burst
higher
from
persistent
bearishness
toward
the
upper
range
of
net
bullishness.
The
chart
here
shows
this
gauge
mostly
reflects
underlying
market
action
itself,
and
when
at
similar
levels
following
a
long
stretch
of
subdued
attitudes
has
typically
not
lined
up
with
a
significant
market
peak.
Ned
Davis
Research
chief
U.S.
strategist
Ed
Clissold
made
a
similar
point
as
his
firm’s
short-term
sentiment
composite
readings
climbed
into
bullish
territory:
“A
cyclical
top
rarely
comes
when
sentiment
barely
reaches
the
optimism
zone.
Instead,
look
for
the
sentiment
composites
to
remain
in
excessive
optimism
in
the
face
of
bad
news
as
a
sign
that
the
market
has
reached
the
top
of
the
wall
of
worry.”
Climbing
the
wall
of
worry
Importantly,
Wall
Street
has
worked
hard
in
the
first
half
to
add
levels
to
that
worry
wall
as
some
bricks
fell
away.
In
January,
the
complaint
about
the
New
Year’s
rally
was
the
outperformance
by
“junky”
speculative
stocks,
even
though
this
is
true
both
in
new
bull
markets
as
well
as
fleeting
head-fake
rallies.
In
February,
hot
January
jobs
data
had
the
Fed
supposedly
jacking
short-term
rates
to
6%.
March
brought
the
SVB
Financial
failure
and
talk
of
a
sudden
credit
crunch.
By
April,
the
market
recovery
was
being
assailed
for
being
too
narrowly
dependent
on
a
few
mega-cap
tech
names,
while
as
soon
as
the
debt
ceiling
deal
was
reached
in
DC,
a
fresh
scare
story
was
spun
about
the
Treasury
sucking
dangerous
amounts
of
liquidity
from
markets
as
it
furiously
issued
debt
to
rebuild
its
cash
stash.
I’ve
generally
pushed
back
against
each
of
these
whipped-up
perceived
threats,
not
because
they
presented
no
hazard
but
because
the
crowd
rushed
so
quickly
to
propagate
them,
which
said
more
about
investor
skittishness
than
the
imminence
of
the
danger.
That
being
said,
it
seems
as
if
the
recent
rally,
the
draining
of
volatility
from
the
tape
and
the
decent
run
of
economic
data
lately
have
made
investors
less
prone
to
searching
for
the
next
nasty
catalyst,
another
sign
that
the
bull-bear
debate
is
on
more
even
footing.
This
isn’t
quite
the
same
as
saying
“everyone
is
bullish.”
The
median
year-end
S
&
P
500
target
among
Street
strategists
is
4250,
100
points
below
Friday’s
close,
and
the
most-bullish
forecast
is
for
about
a
5%
further
gain.
Overvalued
already?
Sure,
the
AI-driven
speculative
energy
has
washed
over
the
limited
number
of
big
stocks
geared
to
that
theme,
sending
Nvidia
stratospheric.
But
it
all
only
got
rolling
seven
months
ago.
We
haven’t
even
seen
a
parade
of
IPOs
to
capitalize
on
the
fever
yet,
and
no
genuine
mania
worthy
of
the
label
lacks
those.
Still,
stocks
have
rapidly
recaptured
a
big
chunk
of
the
valuation
decline
achieved
by
last
year’s
bear
phase.
The
Nasdaq
100
peaked
in
November
2021
at
31-times
forecast
12-month
earnings,
bottomed
just
under
20x
and
has
raced
back
up
to
27x.
Arguably
the
old
peak
was
even
higher,
given
that
earnings
in
the
following
year
fell
short
of
expectations.
So
if
profits
are
poised
to
come
through
as
anticipated
in
the
next
year
perhaps
the
index
is
a
bit
farther
from
that
valuation
apex.
And
just
as
the
market’s
performance
has
been
skewed
toward
these
hit
hyper-cap
tech
stocks,
so
is
the
S
&
P
500’s
valuation.
WisdomTree
CIO
Jeremy
Schwartz
last
week
noted
that
outside
the
“expanded
tech
sector”
—
the
traditional
grouping
before
S
&
P
carved
away
many
Internet
stocks
—
the
rest
of
the
index
now
trades
right
at
its
30-year
median
forward
P/E
of
16.7x.
As
all
this
shows,
the
bullish
factors
are
no
longer
unequivocal
or
unrecognized,
while
the
bearish
inputs
carry
asterisks
detailing
possible
mitigating
elements.
Without
bestowing
any
undue
authority
on
them,
the
traditional
antecedents
of
an
economic
recession
such
as
the
long-inverted
Treasury
yield
curve
and
steep
decline
in
the
Leading
Economic
Indicators
are
probably
best
not
dismissed
either.
There’s
a
decent
case
to
be
made
that
the
market
did
a
fair
bit
of
work
anticipating
a
slowdown
last
year,
and
even
now
with
cyclical
weathervane
stocks
such
as
Capital
One
Financial,
General
Motors,
Whirlpool
and
Best
Buy
all
down
between
30%
and
40%
over
the
past
two
years.
RBC
Capital
strategist
Lori
Calvasina
was
early
in
espousing
this
view
and
has
even
invoked
the
late-1940s
cycle
in
which
the
stock
market
essentially
ignored
a
brief
recession
following
the
post-World
War
II
inflation
shock
and
fiscal
retrenchment.
An
intriguing,
but
as-yet
untested,
take.
.SPX
1Y
mountain
S
&
P
500
1-year
Big
picture:
The
market
this
year
has
chewed
through
plenty
of
perfectly
valid
excuses
to
falter
without
doing
so.
The
main
indexes
are
in
a
clear
uptrend,
digesting
an
upside
overreach
in
the
short
term,
the
S
&
P
500
still
comfortably
above
its
50-day
average
yet
nearly
10%
below
where
it
traded
18
months
ago
–
when
U.S.
nominal
GDP
was
15%
lower
and
the
Fed
was
about
to
jack
rates
up
by
five
percentage
points
in
record
time.
Meantime,
housing
activity
and
industrial
production
seem
already
to
have
begun
their
rebounds.
There
seems
no
fat
pitch
about
to
be
delivered,
but
Bespoke
Investment
Group
on
Friday
addressed
the
hard-to-trust
economic
outlook
alongside
the
reassuring
tape
action:
“As
we
say
time
and
time
again,
when
the
signals
are
mixed,
we’ll
always
defer
to
the
market.
At
this
point,
the
market
still
hasn’t
even
broached
the
prior
highs
from
last
August,
so
the
bulls
still
deserve
the
benefit
of
the
doubt.
Given
the
economic
and
interest
rate
backdrop,
though,
investors
should
hang
on
to,
and
even
consider
shortening,
the
leash.”
