After a strong January for the markets, the question is, can the rally continue? Fortunately, technical analysis helps us answer this question. One bullish market development that happened last Thursday for the first time in two years, a golden cross occurred in the S&P 500. A golden cross is a bullish signal when the 50-day moving average crosses above the 200-day moving average. Historically, a golden cross means a positive market. The S&P 500 has historically generated positive returns over the 12 months following each golden cross. Of the previous 36 golden cross signals, the index produced forward for an average return over the following 12 months of 10.5%. What’s more interesting is when the 200-day moving average is declining, such as the recent occurrence, the average return for the S&P 500 jumped to 16.8% over the following 12 months. We’re able to analyze technical analysis for confirmation that there is a trend change for the market and further raises the probabilities that the bear market low that we saw back in October and the current direction of the market appears durable, just probably not at the pace seen in January, but still a positive sign for the market going forward.
The Federal Reserve met last week and announced its interest rate policy. As expected, they raised rates from 4.5% to 4.75%. That was in line with expectations and not nearly as aggressive as when they closed the year by raising rates by 50 and 75 basis points at a time. The Fed appears to be slowing down, and the market has taken that positively. However, in the Fed’s official statement, one sentence was missed initially that the market may be taking more aggressively now. Jerome Powell said, “The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.” That 2% number is important because many market participants have been looking for the federal funds rate to get above the current inflation rate. The current rate of inflation is 6.5% and the federal funds rate at 4.75%. That’s not nearly as far to go, especially with two inflation numbers coming out between now and their next meeting in March. You could easily see how inflation could fall down to where the federal funds rate is currently. However, with inflation at 6.5%, that’s a long way from 2%. Is the Fed moving its target of getting the federal funds rate above the current inflation rate, or are they trying to get inflation all the way down the 2%? That’s a much more aggressive stance if the Fed remains aggressive until inflation is at 2%. They sent some mixed signals with their statement and if you don’t want to fight the Fed, it’s hard to see where they’re going. There’s a lot of data left to come out but the next most important data point we’re watching for is the inflation report, which comes out on the 14th of this month.
So far this quarter, half of the companies in the S&P 500 have reported their earnings. Sales growth is up 4.6%, beating expectations, but earnings growth is short at -2.7%, with energy still being the outperformer. What’s interesting is that these numbers show us what is going on right now and looking back. Looking at the projections for 2023, those numbers have started to come down. Every time each company reports its earnings it puts out a projected earnings estimate. So far, these have been coming down. We started last year with earnings per share of around $245 for the entire S&P 500. This year EPS took a steep decline down to $224. Job cuts are not factored in these earnings reports but we’ve seen a lot of them. While they are never good for the employees, job cuts help companies expand their margins. They have fewer costs, which factors into earnings costs, cost of goods sold, and things of that nature, so it’ll be something to keep an eye on going forward.
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