Entering 2023, many investors were skeptical after the drubbing that US markets took in 2022. Inflation soared, geopolitical tensions came to a fever pitch, and earnings fell. Last year tech stocks lagged, and the Nasdaq 100 ETF (QQQ) fell 32.58%. However, as markets often do, thus far in 2023, they have fed off uncertainty and have climbed the wall of worry. The best example is the Q’s – the tech-heavy index is higher by 37.94% year-to-date. Now, the question on investors’ minds is, “What’s next for stocks?” Below I will debunk 5 bear myths:
“Market Breadth is Insufficient”
On Wall Street, breadth refers to the overall participation and direction of the stocks that make up the market indices. By gauging the number of advancing stocks versus the number of declining stocks, stock market breadth provides investors with valuable insights into the market’s strength and the level of underlying support in the market. Though stock market indices can rise for a while with limited leadership, participation must eventually broaden out to have a sustained advance.
Meta Platforms (META), Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA) have been dubbed “The Magnificent Seven” because of their incredible performance of late. For example, Apple is not worth nearly $3 trillion. Because of their outstanding performance, these mega-cap tech stocks have been responsible for a large portion of the year’s gains. However, recently, market breadth is broadening out in a big way. After a slow start to the year, the Nasdaq-100 Equal Weight Index ETF (QQQE) is up 21.1% year-to-date and just broke to new highs.
Though the market-cap index is drastically outperforming, the argument of lack of market breadth is dissipating quickly. Furthermore, the broadening out of the market is not just occurring in tech – the small-cap Russell 2000 Index ETF (IWM) is showing signs of life. While the Qs were flat on Monday, IWM ramped a healthy 1.71% and is on the verge of a major breakout.
“Earnings Are Still Flat to Down”
Though the above statement is true, history tells us that equity markets tend to bottom long before earnings do. In the three past major earnings slowdowns (the internet bubble burst, Global Financial Crisis, and the COVID correction), stocks bottomed long before earnings did. In other words, investors tend to discount rebounding earnings ahead of time.
“Everyone is Bullish Now”
Several sentiment indicators are indeed showing excess bullishness However, this is normal during the infancy of a bull market. Nevertheless, one important sentiment indicator remains negative. According to Bloomberg, Wall Street Strategists are sticking to their cautious equity views into the second half of the year. On average, analysts expect negative returns for the second half of the year.
The past four times analysts predicted lower second halves in the aggregate, stocks finished the year’s second half higher each time.
“Inflation is Still a Problem for Stocks”
While inflation may still be elevated, what is important for investors to note is that it is dropping on a relative basis. According to Truflation’s real-time US inflation gauge, the inflation rate has decreased to 2.3% from over 11% a year ago.
Furthermore, used car prices plummeted by 3.8% last month, marking the largest drop in three years. Used car prices are a leading indicator when it comes to inflation.
“Strong Jobs #’s Will Lead to a Hawkish Fed”
Last week, the ADP jobs number suggested that the US added 497,000 jobs – beating expectations of 235,000. However, the payrolls number, which tends to be much more accurate, has been revised lower every month in 2023. In other words, though the jobs market is strong, it is not as strong as the ADP number suggests.
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