Can the market rally continue? Weighing the pros and cons of the path ahead

DEWITT, Mich. - Feb. 15, 2023 - PRLog -- Key Takeaways:

• The market rally this year has been impressive. Most asset classes have participated, and the laggards of last year have particularly outperformed. These outperformers include parts of technology, small-cap stocks, international equities, and even more speculative parts of the market.
• However, last week some uncertainty and volatility returned to markets. The S&P 500 was down over 1.0% on the week, its worst week of the year thus far. Treasury bond yields moved higher, while oil prices climbed as well. Markets may be now approaching somewhat of a crossroads: Does the rally continue unabated or does volatility increase?
• Below we weigh the pros and cons that will perhaps determine the road forward. Overall, the path ahead may become choppier, but we believe markets over time will be well-positioned for a more sustainable recovery. As inflation falls closer to the 2.0% target, and as earnings revisions show signs of bottoming, markets should be able to look ahead toward an economic recovery. Meanwhile, these periods of volatility can be used as opportunities to rebalance, diversify, and add quality investments at better prices.

What has been working this year?

Inflation continues to moderate: Clearly, better inflation data has been a key driver for markets over the past several months. Headline CPI inflation in the U.S. has come down for six straight months and has been in line with forecasts or surprised to the downside for the last three months. Market forecasts now call for headline inflation to fall to under 4.0% by year-end and closer to 2.5% by 2024¹. This, of course, takes some pressure off the Federal Reserve and global central banks that have been raising rates aggressively to bring down inflationary pressures.

Labor market continues to defy gravity: Certainly, one of the bigger upside surprises for the market has been the strength of the labor market. Last month's U.S. jobs report highlighted this clearly – 517,000 new jobs added versus expectations of just 185,000. The unemployment rate fell to 3.4%, the lowest in decades, while wage growth also moderated². In addition to the jobs report, real-time weekly jobless claims data continues to remain resilient, with weekly claims averaging about 193,000 in 2023 thus far, below last year's average of about 215,000³. This indicates that despite headlines around layoffs (concentrated largely in the technology sector), jobless claims continue to reflect a healthy labor market. The stronger labor market ultimately supports consumers and consumer confidence, which could keep demand trends elevated in the near term.

Sources: 1. Bloomberg consensus forecasts, 2. FactSet 3. FactSet