Worries about a potential recession weigh on the market as we move into 2023 and try to put the misery of 2022 behind us. The market action started the new year very poorly as opening strength was immediately sold, and stocks struggled the rest of the day.
Recessions are reflected in two ways. First, bonds are stronger. The 20+ Bond Fund (TLT) rallied 2% yesterday and is up 1% this morning. Bonds become much more desirable as a safe haven when there are growing worries about a recession.
Inflation worries are still a concern but are now much more focused on the jobs market. While CPI and consumer prices have slowed, there are a few signs that labor-driven inflation is slowing. That is the Fed's main concern, and the market is worried that the Fed will produce a recession as it tries to slow the very strong jobs market.
Recession concerns are also reflected in the poor action in names such as Apple (AAPL) and Tesla (TSLA) . These stocks were key leaders for many years but are now hitting new 12-month lows and dragging the indexes lower. There are concerns that sales are slowing for both stocks, and so far, there are no signs of technical support, although both are oversold at this point.
Another clue of recession worries is the weakness in oil stocks. Although China has been acting better as it reopens its economy, there are struggles for energy and commodities due to slowing demand. The Russia-Ukraine conflict caused great concern about supply problems, but now the primary issue is a lack of demand.
The very poor market is a reflection of the struggles to price in the impact of a recession. There are still many experts that believe earnings estimates are too high, but that will soon be addressed as fourth-quarter earnings start to hit in a couple of weeks.
Technically the market is in miserable shape. The Nasdaq and Nasdaq 100 are not far from retesting 12-month lows, while the S&P 500 and Russell 2000 are struggling to hold above last week's lows.
There are very few pockets of strength, and there isn't much reason to bottom fish as stocks are still groping for support. The best course of action is to stay patient and wait for better conditions for some sort of oversold or counter-trend bounce to develop.
We have a little early strength, but after yesterday it will be tough to trust.
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