The Bull Market Conundrum: To Hike or Not to Hike?

The latest employment data for January showed a surprising increase of over half a million jobs, far surpassing the expectations of economists (188000). The unemployment rate also dropped to 3.4%, the lowest since 1969, which supports the Federal Reserve’s rate hike campaign. The resilience in the labor market gives the Fed more flexibility, but the risk of over-tightening remains, potentially causing a recession. On the other hand, the stock market (SPX) rose by 6.18% in January, hitting the January Trifecta Indicator (The Santa Claus Rally, the First Five Days market performance, and the January Barometer), which has a 90.3% chance of a positive year based on historical trends. This suggests that the market is pricing in a soft landing instead of a recession. However, there is a historical pattern that significant drops in the Consumer Price Index (CPI) above 6% are often followed by a recession. It is uncertain whether 2023 will be exceptional in this regard.

Although a recent Bloomberg survey showed that 47.5% of economists believe the economy is headed towards a recession, the market appears to be becoming more bullish. Some technical indicators suggest that the bear market has ended, such as the breaking of a long-term downward trend line, the formation of an inverse head and shoulders pattern, the replacement of lower low patterns with higher highs, and a golden cross of long-term moving averages (14 & 41WMA).

Despite the bullish market, it has been overbought and a pullback is expected due to the fast pace of growth. The recent market surge will be tested to determine whether it is the start of a bull market or a bull trap. The technical and fundamental outlook will be further evaluated. (Watch our YouTube video).

Our long-term investment portfolio saw an increase of 9.87% in January, bringing its total return to 43.93% since May 2020 (click for our latest portfolio performance report). Meanwhile, our dynamic investment portfolio rose by 9.62%, resulting in a total return of 8.59% since May 2020. Our structured investments portfolio saw an improvement of 26.23% in January, not only refining the returns but also strengthening their protective barrier. As most structured investments are long-term (3 years and beyond), we believe that the continued improvement in market conditions will further enhance their overall performance.

Some argue that the bulls could get trampled in two different situations – (1) if the economic data is sizzling hot and forces Powell to crank up the hawkish talk, or (2) if the economic data is so weak that it resembles a recession, taking the soft landing off the table. But, more and more evidence is pointing towards us being in the early stages of a bull market, and confusion and denial are classic hallmarks of this phase. Although, making predictions is always a risky game.