Investors Aren't Sure When To Dive Back Into Stock Market

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The pause in the stock market’s strong start to 2023 underscores the main question vexing much of Wall Street: When will it be safe to start buying again?

Yes, markets have grown increasingly confident that the slowdown in inflation will allow the Federal Reserve to soon end the cycle of aggressive interest-rate hikes that last year drove the S&P 500 index to the worst drop since 2008. But at the same time, those higher rates could drive the economy into a recession and slam the brakes on any growth.

Positioning for this financial yin-yang is tricky, to say the least.

“The S&P 500 has never bottomed before the start of a recession, but it’s not clear yet whether the US economy will actually fall into a downturn,” said Ed Clissold, chief US strategist at Ned Davis Research, whose firm forecasts a 75% chance that the US will slump into an economic slowdown in the first half of 2023. “Some indicators are telling us that a soft landing isn’t off the table. All of these cross currents do make it challenging for investors to position in US stocks.”

Those cross currents leave the stock market poised for a choppy start to the year as investors rely on incoming economic data and eyeball historical trends for clues. Last week, the S&P 500 dropped 0.7%, snapping a two-week winning streak, though the index rallied 1.9% Friday, thanks to a surge in tech stocks as Fed officials dialed back fears of overly aggressive policy moves. The tech-heavy Nasdaq 100 Index had its best day since Nov. 30 to eke out a 0.7% gain for the week.

Clissold said the historical performance of different sectors can provide a guide to where to invest heading into a downturn. Those that tend to peak late in economic cycles, like materials producers and industrial companies, usually perform strongly in the six months ahead of a recession. The same goes for consumer-staples and health-care stocks.

At the same time, stocks from rate-sensitive industries like financials, real estate, and growth-oriented technology tend to lag during that period.

The problem is the scope of last year’s selloff makes historical comparisons difficult to use. In fact, last year’s big losers — like rate-sensitive tech and communications services stocks — are among the best performers this year, leaving investors wondering if the worst of the bear market decline is behind them.

In the coming week, markets will sort through earnings results from Microsoft Corp., Tesla Inc. and International Business Machines Corp. that are poised to shape the direction of equities more broadly. Also, the Commerce Department on Thursday will release its first estimate of fourth-quarter US gross domestic product, which is expected to show an acceleration.

To Mark Newton, head of technical strategy at Fundstrat Global Advisors, the S&P 500 likely bottomed out in mid-October. And he thinks it’s premature to completely write off beaten-down technology stocks.