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Stock Market Direction Note

 
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PostPosted: Fri Jan 06, 2023 4:55 pm    Post subject: Stock Market Direction Note Reply with quote

Below is the stock market direction note I posted on October 28 2022. I still expect a SPX downtrend to at least 3,200 this year, although there will be powerful bear market rallies along the way, and above average volatility. When the recession begins, perhaps in Q2 2023, then that's when the SPX downtrend begins and may last six months.

Market Direction over next 12 months - October 2022 to October 2023

The current S&P 500 P/E in 2022 is roughly 3,900/220 = 17.7. With Core PCE at 5.1%, the S&P 500 is overvalued by at least 500 points. Core inflation will fall slowly with slower GDP growth going forward. So, we can expect S&P 500 earnings to fall, which will make the S&P 500 more overvalued at 3,900. This is a simple or incomplete analysis. However, it's much more likely the S&P 500 will fall to 3,000 than rise to 5,000 in the coming year. The Fed will be determined to get ahead of inflation and although it may slow the 75 basis points hikes to 50 basis points, it will continue to tighten significantly. The Fed began the tightening cycle when the economy may have been in recession the first half of 2022. It will have to maintain a restrictive stance even in a 2023 recession to bring down inflation, which is sticky and core inflation takes longer to decline. Of course, there will be bear market rallies along the way as the process unfolds.
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