Market Insights

Stocks began the New Year with gains as investors see the potential for inflation to ease without a recession.

The S&P 500 broke a four-week losing streak, rising 1.5 percent in the holiday-shortened period between Friday, December 30. Every major sector advanced, along with other key indexes like the Nasdaq-100, Dow Jones Industrial Average and Russell 2000.

While inflation and a hawkish Federal Reserve dragged on stocks most of 2022, last week brought signs of potential improvement. Friday’s employment report, for example, featured strong job growth and lower unemployment. However, worker compensation rose less than expected. That relieved fears of runaway wage growth driving prices higher.

Other reports from the Institute for Supply Management showed more weakness in manufacturing and services as prices eased. Those readings also diminished inflation worries.

Bond yields and the U.S. dollar fell in response as investors looked for the Fed to slow its aggressive pace of interest-rate increases. It’s almost exactly the opposite of what happened a year ago as the bear market began.

China, Metals

The result was a “risk-on” environment. Money poured into Chinese stocks, which have also benefited from the country reopening from coronavirus lockdowns. Industrial metals, which benefit from a strong global economy, and precious metals, which benefit from the weaker U.S. dollar, also led the market. Other big gainers included airlines, oil servicers and semiconductors. All of those typically perform better in a strong economy.

The price action could be consistent with a “soft landing.” That’s when central bankers manage to slow inflation without causing a recession. The classic example was 1994, which preceded the historic bull market of 1995-2000.

Charting the Market

Several chart patterns could appear potentially positive for technical analysts.

First, the S&P 500 is trying to hold 3,800, about 200 points above its base in early October. A new high at the start of a new quarter?

Second, short-term momentum indicators like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are turning upward.

Next are the “intermarket signals” on other charts. For example, Cboe’s Volatility Index ($VIX.X) typically rises when the market falls. It bounced around 20 percent last April and August as the S&P 500 peaked. But it’s been unable to rally in the last month. Bond yields and the U.S. dollar, mentioned above, have given similar signals.

There has also been positive “breadth” as more stocks do well despite apparent weakness. TradeStation data shows that 58 percent of the S&P 500’s members up in the last month, despite the broader index falling 1 percent over the same period. The main reason has been selling pressure in large Nasdaq issues like Tesla (TSLA), Apple (AAPL), Microsoft (MSFT) and Alphabet (GOOGL).

The Week Ahead

The market now faces a mix of potential challenges as it begins the first full week of 2023. There’s key inflation data, central-bank Fed news and the start of earnings season.

Today’s agenda is quiet, but tomorrow features a speech by Fed Chairman Jerome Powell at 9 a.m. ET. Investors will likely monitor his comments for any new insights on inflation and monetary policy.

Crude-oil inventories follow on Wednesday.

Thursday’s big item is the consumer price index (CPI) inflation report at 8:30 a.m. Initial jobless claims are also due.

Friday brings more inflation data (import and export prices) and consumer sentiment. Earnings season begins with financials like Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC) and Citi (C). Delta Air Lines (DAL) and UnitedHealth (UNH) also report.