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HomeMarketThe Bulls Have It in 2023—and Last Year’s Losers Are Winners

The Bulls Have It in 2023—and Last Year’s Losers Are Winners

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The stock market has flipped the script for 2023.

It was widely expected that stocks would falter in the first half of the year as the Federal Reserve continued to boost rates and then rally after midyear when the Fed finally stopped tightening.

But stocks have surged in January, with the
S&P 500 index
up 6% after a 2.5% rise this past week. The
Nasdaq Composite
has risen 11% so far in 2023, following a 4.3% increase in the past five sessions. The S&P 500 rose above its 200-day moving average, an impressive technical indicator. The index has regularly advanced in intraday trading, including every session this past week, another bullish sign.

It has been a risk-on rally led by some of the harder-hit sectors of 2022—technology, banks, entertainment, and commodities. Defensive groups that held up well in 2022 when the S&P 500 declined over 20%—consumer staples, healthcare, and utilities—all are down about 2% in 2023.

Within the winning groups, the most speculative stocks are leading.
Warner Bros. Discovery
(ticker; WBD), the debt-heavy media company, is the top stock in the S&P 500 this year, with a gain of 57%, after falling 63% in 2022.

(TSLA) is No. 2 in the index. It’s up 44%, to $178, including a 33% rise this past week as CEO Elon Musk offered bullish comments on demand for the company’s electric vehicles. Unfortunately for Tesla investors, the stock will have to hit $352 to get back to where it started 2022.

Why the move in the market? Fundstrat’s Tom Lee, one of the most bullish strategists coming into 2023, felt that inflation peaked in mid-2022 and that the Fed would “need to course correct” this year, leading to a 20% gain in 2023.

“The incoming data for the past few weeks is supportive of our view, and hence, equities are showing far more resilience than the consensus narrative,” he wrote on Friday. The consumer price index, for instance, has risen at just a 2% rate in the past six months.

The Fed is widely expected to boost the key federal-funds rate by a quarter percentage point this coming week to a range of 4.5%-4.75%, and a similar-size interest-rate hike is expected in March. That could finish the tightening move that has taken short-term rates up from near zero.

Then the easing is expected to begin, though its pace is the subject of considerable debate. The bond market is discounting one rate cut late this year and many actions in 2024 that would take short-term rates down to 3%. Stock investors think the easing pace will come more quickly.

“Valuation isn’t a headwind,” says Hank Smith, head of investment strategy at Haverford Trust. “The S&P 500 isn’t egregious at 18 times forward earnings with inflation coming down.”

S&P 500 earnings are expected to be up just 4% this year. That could prove conservative. Smith points to several bullish factors for profits, including a weaker dollar, the reopening in China, lean inventories, and cost-cutting moves.

It’s rare, also, to see back-to-back yearly declines in the S&P 500. It has happened just twice since the end of World War II—in 1973-74 and for three years from 2000 through 2002.

Treasury inflation-linked savings bonds are likely to see lower yields because of the drop in inflation in recent months.

The rate on Treasury series I bonds is reset every six months, and the new rate in May probably will be lower than the current 6.89%. The May reset will be based on the change in the consumer price index from September 2022 to March 2023.

So far, three months of data are in, and there has been no change in the index. Assume 0.3-percentage-point monthly increases from January through March, and the new rate in May is likely to be about 2%.

Investors swamped the Treasury’s website in October to get a 9.6% rate, which had prevailed for six months before the setting of the current rate in early November. October issuance totaled almost $7 billion, a monthly record, and fell to about $1 billion in both November and December.

Even with a lower rate, I bonds have some advantages. They offer investors protection against inflation, carry a current real rate of 0.4% on top of the inflation adjustment, and come with tax benefits. Investors can defer paying taxes on the interest income until maturity in 30 years, giving them an IRA-like quality. Interest is exempt from state and local taxes but subject to federal income taxes.

The drawback: Individuals can buy just $10,000 of the bonds annually.

Write to Andrew Bary at


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