Dear Fellow Investor,
One of the worst things you can do is constantly seek data that supports your worldview. It speaks to your own bias.
Today, people go out of their way to find political “news” that aligns with theirs and presents it as fact. Humans struggle to think for themselves — and are easily influenced by information that supports their personal narrative. It’s become an increasing problem in the era of 24-hour cable news, Twitter arguments and the emergence of China’s TikTok.
Even the best economists worldwide always seek information to support their views. I take the charts below with a grain of salt, as I want to ensure that I’m not overly enthusiastic by what I’m seeing.
But each chart will provide you a storyboard of what I feel about this market. I’m not saying that my argument for 3,250 for the S&P 500 in 2023 is ironclad, as the Federal Reserve could pivot any time… or congress could magically inject a trillion dollars and drive the market to the moon.
Let’s dive into expectations on Wall Street for the year ahead…
Chart 1: Wall Street is Bullish (As Always)
Leave it to Fund Strat’s Tom Lee to set the most bullish outlook for the S&P 500 in 2023.
There are some analysts who just can’t help themselves, the eternal bulls of the market. Every short-term pop, every bear market rally, every bull trap, Lee parades onto CNBC and tells everyone that they need to buy… buy… buy. If the market does rally to 4,750, he looks like a genius. If it doesn’t, he can just blame the Fed or American consumers. But there’s never a deeper understanding of the downtrend.
Lee isn’t alone in a few aggressive calls for the S&P 500. Deutsche Bank presents an aggressive case for 4,500. U.S. banks are also bullish and anticipate a pop later this year above 4,000.
But these forecasts don’t show you the pain that is likely along the way. With the Fed cutting its balance sheet by $1 trillion, an expected slowdown in corporate buybacks and earnings compression the next challenge for companies, we could easily see the S&P 500 fall to 3,000.
Do the math from there…
The S&P 500 would need to jump by 50% (from 3,000) to match Lee’s projection. It would need a 33% rally from that projected bottom to match the consensus outlook of roughly 4,009 for the index.
I’m not saying this sort of rally isn’t set to happen… I’m simply arguing that you’d better buckle up.
Either you trade short-term momentum based on the moves of institutional capital, or you embrace the rollercoaster right now. There could be wild swings. That’s why it’s important to buy into cheap companies that already have strong dividends to help you navigate the next 12 to 18 months.
For the record, I do agree more with the European banks at the bottom of the list. I’m willing to entertain the projections of UBS, Barclays, Société Générale and BNP Paribas. Having experienced significant compression over the past year in Europe, they’re more likely to understand the challenges ahead for the U.S. equity markets.
Chart 2: Can Someone Tell Me What’s Happening?
Wall Street is all over the place on the final stop for the S&P 500 in 2023.
But ask them for a prediction on when — or if — the U.S. is heading into a recession, and you’ll get indecisiveness that only compares to 27 children all deciding which toppings to put on a pizza.
JPMorgan says a mild recession will hit late in the year. Bank of America has a recession starting in the first quarter. Goldman Sachs says “No recession.” Deutsche Bank puts the recession in the back half of the year. Wells Fargo says “mild recession” halfway through 2023.
Again, it’s impossible to take the advice of one bank due to the massive amount of variables in this market.
I continue to argue that traders and investors need to operate and trade the chart that is right in front of them.
Momentum, right now, is red. And there is still ample reason to expect a retest of 2022 lows in the first quarter. Either you take time to buy stocks and understand that there will be a rollercoaster all year long in their prices, or you sit it out.
I believe that a shallow recession is coming, but the Fed’s balance sheet and what else it breaks will be the central focus of this market. It has to be.
As the chart above shows, there is a direct causal relationship between the market capitalization of the U.S. exchange market and the U.S. Reserve balances with Federal Reserve banks. This stuff just continues to show how little the mainstream media is focused on the role of the central bank’s liquidity in the financial markets.
Chart 3: Consolidation in Banking Remains Ripe
Finally, if you have ever wondered how banking consolidation works, take a look at the chart below. From 1996 to 2009, the United States had nearly three dozen banks and allowed consolidation down to four megabanks: Citigroup, Bank of America, Wells Fargo and JPMorgan Chase.
We’re about to see a wave of consolidation once again after we emerge from a recession and banks begin to put money to work in late 2023 to purchase smaller rivals. The consolidation trend in community banking has been one of the most powerful and profitable financial trends for the past 30 years.
That’s why I chose what I believe to be the most undervalued bank in my new Tactical Wealth Investor letter. The community bank holding company at the core of the portfolio pays more than 8% right now in yield and is trading at a tangible book value of roughly half its real value. That means this $14.50 stock could surge to more than $30 in the next 18 months. Why not get paid to buy and hold this stock, and wait for the corporate raiders to arrive?
I’ll be in New York for the rest of the day, and heading to Chicago in the morning.
To your wealth,
P.S. Let me know if you have any feedback, questions about today’s issue or anything else. Just email us at firstname.lastname@example.org.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
Momentum is RED.
Shares of Apple and Tesla continue to break down, and optimism around earnings season continues to grow more and more negative. Energy has taken the largest hit today, while technology faces new stress levels. We must keep our focus on the long term, as there will be ample volatility in the coming days.