5 critical factors to monitor, a stock market crash, no. But a Bull Market?

April 6, 2023
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Making money in stocks

Remember, stocks lead earnings and earnings, lead the economy

Considering everything that happened in Q1 2023 and there has been a lot. Bank collapses, stubborn inflation, rising interest rates and continued talks of a recession. The stock market continues to rebound. The S&P 500 is up over 7% and the NASDAQ 100 up over 21%. How to make money is stocks?

A pleasant experience after a difficult 2022, when the S&P closed down 19% and the NSADAQ 100 was down around 30%.

Economists and financial commentators point to several problems in the U.S. economy. The U.S. yield curve is inverted, which normally indicates a recession.

Inflation remains high and the Federal Reserve continues the inflation fight. Thus, further rises in interest rates are expected.

With all the negative sentient out there, what gives??

Repeat and remember the easy phase, the heading of this paragraph. Stocks lead earnings and earnings, lead the economy.

That’s how to make money in stocks.

5 critical factors impacting stocks in 2023

The first quater defied expectations. The rate of returns on the SPY and the QQQ seen so far in 2023 have been strong. But, they are unlikely or will not continue for the remained of 2023. Equally, it is highly unlikely to see a stock market crash in 2023.

Let’s take a look at the 5 critical influences, good or bad, on stocks for the rest of 2023. Rated in importance from most to least, just in case you don’t get to the end.

- - Earnings
  - Banks
  - Oil Price
  - Inflation
  - Interest Rates

EARNINGS

Earnings: Making Money in Stocks

Fundamental Analysis drives the stock markets, Sales, Earnings, PE Ratios, Growth Rates. The key driver for all of this is the Analyst’s earnings estimates or Forward Estimates. The Analytical community will issue their earnings estimates for the companies they follow. This will typically be for the current Financial Year (FY0), next year FY1 and possibly FY2.

The current issue is that these estimates are all over the place. This is making it difficult to make money in stocks. For this Financial Year, the consensus estimate for the S&P 500 is +5% earnings growth. Keep in mind, moving into 2023 estimates have been upgraded more than downgraded.

Confusing?

Yes, economists and market commentators are still forecasting a recession in 2023. Earnings growth of +5% while the continued calls for a recession is, to say the least, contradictory.

What gives?

Stronger than expected earnings and falling inflation, creates an attractive cocktail for stocks. Could this lead to a significant rally in stocks?

The setting of a new bull market is emerging. Driving these upward revisions, could be the exact talk that breeds fear, Recession. In anticipation of a possible recession, companies should restructure. This is exactly what has been happening across the Tech Sector and in Financials.

Are forward earnings estimates actually underestimated?

Graphs and data by Finscreener

BANKS

Banks: A key Sector to make money in stocks

Center stage of the suspense and drama in the first quarter where the banks. The opening act for the drama was the failure of Silicon Valley Bank in early March. This was closely followed by the failure of Signature Bank a few days later, then Credit Suisse. For more on the collapse of the bank stocks, click HERE.

The efforts of both the Federal Reserve and the FDIC intervened to resolve the situation. The immediate reaction was a deep crisis in confidence across the United States. Which regional bank was next?

Wide concerns regarding potential instability across the banks have proved to be unfounded. In the near term, there will be increased regulatory scrutiny of small and midsize banks. Plus, more proactive regulatory intervention.

What does this mean for banks as an investment in 2023?

The bank sector has fallen around 7% in 2023, underperforming the S&P 500 by around 14%. For the stock market to rally and possibly enter a Bull Market. No doubt the underperformance was due to the bank collapse and the perceived systemic risk. The headline risk for the banks is determined by how well funded they are. The major banks are well funded, their PE ratios compared to the market have been compressed.

The Q1 earnings announcements will start for the banks in the next couple of weeks. If YoY earnings exceed expectations and YoY growth is solid. The banks could be a place to make money in stocks.

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OIL PRICE

Oil Price: A Double Edged Sword

As a potential major player to make money in stocks, th oil price is back. In 2022, a Bear Market year for stocks, the Energy Sector massively outperformed up over 50%. This week, oil prices soared when OPEC+, announced output restrictions. This was completely unexpected by the markets. The oil benchmarks, Brent crude and WTI, rose over 6% the day of the announcement.

This is a double-edged sword for stocks. A higher oil price will raise concerns for economists due to concerns over inflation. Market commentators expect this to be positive for the Energy Sector. The sector was an underperformer in Q1. The key is, as some argue, it depends for how long the higher oil price is sustained. A couple of days compared to the remainder of 2023.

Crude oil prices have been relatively consistent year to date. Still, at $80 per barrel, the price is down around 21% compared to 2022. In a manipulated market such as oil, it is near impossible to predict the price, even near term. Nevertheless, predictions of the oil price at around $100 a barrel, this means, selectively, energy stocks are interesting. At this point, energy stocks should be the focus of dividend investors. See the table below.

INFLATION

Inflation Worries Easing

To understand inflation and the impact on stocks is to focus on the Federal Reserve. They continue to say the main focus is to fight inflation. On that basis, inflation remains well above the 2% target. Currently, the inflation rate stands at 6.0% YoY in February 2023. Thus, further interest rate hikes are expected. This rate was the lowest since September 2021, in line with market expectations. Down from 6.4 percent in January and well down from the 9.6% peak in 2022.

What the Fed is really focused on is core inflation rate. This excludes volatile items such as food and energy. In February, for a fifth consecutive month, it was down to 5.5%. The lowest since December 2021. The next announcement for March will be April 12. The market estimate is 5.0%.

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INTEREST RATES

Interest Rates

As interest rates rise, it becomes more expensive for businesses to borrow money. Limiting the possibility to invest in growth. In short, bad for stocks. Keep in mind, Interest Rate in the United States averaged 5.42% from 1971 until 2023. What we are witnessing is a normalisation of interest rates in the U.S.

The Fed hiked the fed funds rate by 25 basis points to 5.0% in March 2023, mirroring the February move. This pushed interest rates to new highs not seen since 2007. The move was in line with most investors’ expectations. The Fed funds rate is expected to increase to 5.1% in 2023.

The issue that came from left field was the series of bank collapses. Some questioned if the Fed should suspend the tightening cycle to ensure financial stability. The Fed stated that the US banking system is solid and resilient. The actions by the Fed will result in tighter credit conditions. This will impact consumers and companies, weighing on economic activity, hiring, and inflation.

smartest-data blog

5 critical factors to monitor, a stock market crash, no. But a Bull Market?

Making money in stocks

Remember, stocks lead earnings and earnings, lead the economy

That’s how to make money in stocks.

5 critical factors impacting stocks in 2023