Stocks rose last week as traders cheered signals from the Federal Reserve and the European Central Bank that interest rates might soon go on hold.
After a strong January, several Wall Street strategists are warning that the rally has gone far enough and stocks will soon reverse course.
Bank of America’s Michael Hartnett, for example, believes that the highs in the market will be seen before Valentine’s Day and any move in the $SPX500 above 4200 should be sold.
Morgan Stanley’s Mike Wilson concurs, arguing that the bullish price action in January was due to the seasonal January effect (a well-known tendency that stocks do well in January) and short covering.
We have a more optimistic view than these strategists for the next 1-2 months, although we do agree that 2023 will be another weak year for the market on the whole, with stocks ending the year in the red. However, we believe the weakness will only start in earnest after April.
At the moment, many still expect an imminent recession. This is inconsistent with the equity market rally and the incoming economic data. After current short-term overbought conditions are resolved over the next 1-2 weeks, we see scope for the market to run higher. But this can only be a temporary rally. The revival of animal spirits, if it happens, will make people happy to spend again, which will lead to higher inflation, which will force central banks to raise interest rates again in H2, finally bringing about a recession. This will cause a second consecutive negative year for stocks.
Given the above view, the portfolio is positioned 100% long risky, economically sensitive stocks, but we expect to reduce risk exposure later in the year.
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The portfolio was rotated around within the space of risky stocks. Profits were taken on the four banks $CBK.DE (Commerzbank AG), $BAC (Bank of America Corp), $HSBC (HSBC-ADR) and $WFC (Wells Fargo & Co) . They were replaced by the three banks $ISP.MI (Intesa Sanpaolo Group) (cheap, strong earnings on 3 Feb, Italy/Germany spread under control), $ITUB (Itau Unibanco Holding ADR) (cheap, Brazil political risk premium might reduce) and $CIB (Bancolombia S.A-ADR) (cheap, Colombia political risk premium might reduce) and the two auto companies $VOW3.DE (Volkswagen AG) and $STLA.US (Stellantis NV) (cheap, rates fell after last week’s central bank meetings which might benefit these companies).