Don’t Fall for the January Rally

The recent stock market recovery has been driven by speculation rather than improving fundamentals, argues Richard Bernstein Advisors.

Illustration by II

Illustration by II

After a tumultuous 2022, many investors breathed a sigh of relief when the stock market began to show signs of recovery in January. But according to investment manager Richard Bernstein Advisors, the current upswing may not last long, because economic fundamentals continue to paint a gloomy picture for the year ahead.

“The stock market rally so far this year seems based largely on speculation rather than fundamentals,” RBA’s latest white paper said. “Investors appear hopeful the Federal Reserve will soon return to a policy of cheap and abundant liquidity while ignoring the Fed’s repeated warnings to the contrary.”

In the paper, RBA outlined a few reasons why investors might want to maintain a defensive stance even as the market appears to be on the verge of rebounding. First, the firm believes that because the money supply in the U.S. has turned negative for the first time in modern history, liquidity has been depleted. More than 40 percent of global yield curves are now inverted, which may lead investors to avoid long-term lending and drive liquidity to contract further, according to the paper.

Second, RBA argues that the central bank now has less flexibility when it comes to the so-called “Fed Put,” an important tool that the central bank can use to save the market from falling too fast. “The Fed could easily rush to the rescue when financial market volatility spiked because expanding globalization and secular disinflation gave them confidence that injecting liquidity into the economy would not cause inflation,” the paper said. “However, with inflation well above the Fed’s 2 percent target and the labor markets historically tight, [we] believe the Fed Put is dead.”

Corporate fundamentals don’t help. According to RBA’s forecast, earnings growth at companies in the S&P 500 index will be negative for all four quarters in 2023. “It has historically been more profitable to speculate when corporate cash flows were improving than when they were deteriorating,” the paper said. “We are not currently forecasting a deep profits recession, but we do think earnings and cash flows could suffer during 2023.”

The January cryptocurrency rally may also indicate that the bubble hasn’t completely burst. Bitcoin, for example, gained roughly 40 percent in the first month of 2023, its best January performance since 2013. But according to RBA, cryptocurrencies have no intrinsic value and only appreciate when market participants expect others to buy them at higher prices in the future. Therefore, “the rally in cryptocurrencies, as well as in meme stocks and profitless companies, suggests [that] speculation, rather than true economic or profit fundamentals, have been driving performance,” the paper said.


“Our portfolios remain defensively positioned away from more speculative sectors like technology, communications, and consumer discretionary,” the paper concluded. “Longer-term we continue to see a shift from ‘cute wiener dogs in the metaverse’ to real productive assets, and we remain more positive on cyclical sectors such as energy, materials, and industrials than we normally might be at this point in the cycle.”