The stock market has started 2023 on a solid note. The S&P 500 and Nasdaq 100 have appreciated by 4.6% and 8.0%, respectively. The S&P 500 has rallied 15% off its October low, which is consistent with previous mid-term election rallies. The strong mid-term rally – which we wrote extensively about this summer and early fall – is due to technical factors (oversold market, passive 401k flows, corporate buybacks, and systematic trend-following strategies) and not a change in the fundamentals.
Lawrence Manley, CFA |
The S&P 500 rallied by more than 17% from its mid-October low. In our view, this was a bear market rally fueled by favorable seasonality, corporate buybacks, passive inflows from 401k's, and declining volatility. We expect the bear market to resume when the year-end rally ends in January.
Lawrence Manley, CFA |
Historically, the 60/40 blend of stocks and bonds (our benchmark) has reduced portfolio risk and maintained most of the stock market's reward because stocks and bonds have a low correlation. Also, in periods of recession or financial stress, bonds act as a safe haven and typically appreciate when stocks fall. In fact, since 1928, there were only five years when both stocks and bonds declined.
Lawrence Manley, CFA |
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In our view, the first leg of the bear market, which was driven by declining valuations, ended on June 16th, when stocks were extremely oversold, and investors were fearful. Then, non-fundamental factors and the false "Fed Pivot" narrative fueled a sharp eight-week bear market rally that ended on August 16th. Currently, stocks are in the second leg of the bear market, driven by a weakening economy and declining corporate profits.
Larry Manley |
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The first leg of the bear market ended in mid-June, and the eight-week 18.9% bear market rally is over. We believe stocks are poised to decline as the economy slows and corporate profits disappoint. In this recessionary environment (declining growth and inflation), we believe the market's defensive sectors (healthcare, staples, utilities, and value) will outperform. Also, we expect long-term treasury bonds and gold to help hedge the portfolio's equity exposure.
Manley Capital Management |
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The bear market accelerated in June as the Fed aggressively raised interest rates to fight inflation, which is at a forty-year high. The S&P 500 declined by 8.4% in June and finished the first half of 2022 down 21%, which was the worst first half since 1970.
Manley Capital Management |
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The stock market decline continued in May, and the S&P 500 “officially” entered a bear market on May 20th by falling more than 20% from its January all-time high. Interestingly, the S&P rallied 8.4% off its May 20th low to finish flat for the month.
Manley Capital Management |
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After a difficult Q1, the selloff in the financial markets accelerated in April because of the extended war in Ukraine, the supply chain issues related to the lockdowns in China, and the Fed's "promise" to raise interest rates quickly to curb inflation. Additionally, stocks suffered in April as disappointing earnings from Netflix and Amazon indicated that surging inflation could be hurting consumers.

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