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A Week of Contradictions in the Market


Last week was a rollercoaster for investors, leaving many feeling unsure about what lies ahead. While the market reached new all-time highs for the Dow Jones Industrial Average and S&P 500, the Nasdaq Composite fell short of its November 2021 record but still hit a new 52-week high.

As founder of Sevens Report, Tom Essaye noted, this past week has been one of the most conflicted and contradictory in his nearly three decades of experience in the market. Investors had to navigate through an uptick in jobless claims and positive inflation data, overshadowing a white-hot jobs report that surpassed expectations. This report could have been seen as evidence that growth and inflation are too high for any near-term rate cut.

Surprisingly, despite the lack of a catalyst like hopes for a rate cut from the Federal Reserve, the optimists in the market seem to have the upper hand. UBS Chief U.S. Equity Strategist Jonathan Golub points out that markets are focusing on the undeniable bright spots in the economic outlook.

The fourth-quarter gross domestic product growth of 3.3% exceeded expectations, while consumer confidence reached its highest level since 2021, supported by three consecutive months of gains. Additionally, the Institute for Supply Management’s Purchasing Managers Index showed improvement. All these indicators signal a soft landing for the economy and explain why any negative news has failed to make a significant impact.

Despite the conflicting signals and uncertainties, investors are finding solace in the positive economic data and seem eager to embrace the potential for continued growth.

Market Sentiment Remains Positive

by Teresa Rivas

Despite the noise and volatility in the market, the bullish sentiment continues to prevail. Many experts believe that there won’t be a hard landing, and the Federal Reserve will cut rates sooner rather than later. Additionally, inflation is expected to decline while earnings growth remains strong.

According to Savita Subramanian, Head of U.S. Equity Strategy at Bank of America Securities, extreme bullishness can be bearish for stocks. However, she points out that the market has not reached that point yet. She refers to the firm’s Sell Side Indicator (SSI), which tracks Wall Street strategist equity allocations. Historically, when Wall Street was bearish, the SSI proved to be a bullish signal, and vice versa. Currently, sentiment has not reached the levels of euphoria typically seen at the end of bull markets.

Last month, strategists actually reduced their equity allocations, which has kept the SSI in neutral territory. This neutral position has historically resulted in positive returns 94% of the time for the S&P 500, with a median return of 20%.

Furthermore, the S&P 500 closed up 1.6% in January, indicating the presence of the January effect. This effect suggests that when the S&P 500 performs well in January, the rest of the year tends to follow suit. In fact, during a US Presidential election year, the index has been up every time, with an average return of 12% from February to December.

Although stocks took a breather on Monday following last week’s gains, it is important for investors not to take those wins for granted. However, it is reassuring to know that the market’s rally is backed by solid fundamentals, and not just temporary momentum.

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