Mrzorro
2023-02-03

Stocks Are at Wall Street's Year-end Target. It's Only Early February

Nasdaq Composite surges 16% to start 2023

Just like last year, Wall Street strategists look pretty wrong about their expectations for stock-market performance in 2023. But this time around, they're in the unusual position of having been too pessimistic.

Back in December, MarketWatch collected year-end price targets for the S&P 500 from 18 investment banks and brokerage houses. Instead of following the herd, their targets were unusual for their range, with some anticipating a further decline for stocks, but others forecasting a powerful rally. The average for the group pegged the S&P 500 at 4,031 by year's end.

The S&P 500 finished Thursday's session above that level at 4,179, its highest close since Aug. 25, according to FactSet data.

Several factors have played into its rebound since the beginning of the year.

'The January effect'

There are a few different theories about what's driving the latest hot streak in U.S. stocks. One is the January effect.

While stocks bottomed in October, the main indexes struggled to sustain their upward momentum in November and December. Although the $S&P 500(.SPX)$  barely eked out a Santa Claus Rally, the index finished the year down 19.4%, and many expected stocks to continue their downward trajectory in the first quarter of 2023.

So far, that hasn't happened. Instead, stocks broke out of a rangebound funk and moved higher shortly after the new year arrived. Fundamentally, not much had changed for the market, except for the calendar, said Steve Sosnick, chief strategist at Interactive Brokers.

"I think we've underestimated the January effect as an explanatory factor in what we've seen this month," Sosnick said.

Many of last year's worst performers helped to lead the rebound, another sign that seasonal capital flows were at least helping to bolster the rally, Sosnick said.

Some examples include $Tesla Motors(TSLA)$ , which was the second-best S&P 500 stock in January after falling roughly 65% last year, and $Carvana(CVNA.US)$, a troubled purveyor of cars that at one time had aspirations of being "the Amazon of used cars." Then there's also the $ARK Innovation ETF(ARKK)$ , which just notched its best month ever with a 27.8% gain in January.

'Goldilocks'

As economists and market strategists like to point out, nothing substantial has changed about the fundamentals of the U.S. economy over the past few months. Still, investors are feeling more sanguine about the possibility that the U.S. economy may avoid a punishing recession as inflation dissipates.

This notion has a name: "Goldilocks." Investors might be acting as if the U.S. economy will soon achieve this fairy-tale ideal, once again

"Investors are increasingly pricing in a benign, even a Goldilocks, mix of peak inflation/rates, a shallow recession, a boost to global demand from China reopening, the dissipation of energy supply concerns, and lower volatility overall," said Stephen Innes, managing partner at SPI Asset Management.

In a Thursday research note, a team of strategists from ING defined the current Goldilocks scenario as one "where inflation can come down, but unemployment does not have to rise."

Charlie McElligott, a cross-asset equity derivatives strategist at Nomura, defined it as "disinflation, but still resilient growth."

It isn't completely unjustified. The consumer-price index shows inflation has been waning for six months since peaking at its highest level in 41 years over the summer.

Data also show the U.S. labor market is still robust despite the Fed's most aggressive interest-rate hikes since the 1980s. Economists polled by The Wall Street Journal expect this trend to have continue in December data, forecasting 187,000 new jobs were created, compared with 223,000 the month before. The number of Americans applying for unemployment benefits has dropped to a 9-month low.

Still, the Fed signaled on Wednesday that it's planning more interest rate hikes, while Fed Chair Jerome Powell said he doesn't expect to cut interest rates before the end of the year, something that the market has been hoping for.

Some strategists expect stocks could swoon if the Fed ultimately disappoints.

"The worst of the monetary headwinds are behind us," Sosnick said about the Fed's rate hikes. "It doesn't mean the monetary headwinds have ended yet."

U.S. stocks added to their yearly gains on Thursday, with the S&P 500 achieving its first "golden cross" in two-and-a-half years. The large-cap index gained 1.5% to roughly 4,179, while the $NASDAQ(.IXIC)$ rose 3.3% to about 12,200. The $DJIA(.DJI)$  was the sole laggard of the major indexes, falling 0.1% to 34,053.


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