A Market Bottom in 2023? 3 Signs To Look For

Equities and cryptocurrencies started their first trading days of 2023 relatively flat as investors and analysts continue to wonder if the worst is behind us. 

The S&P 500 and Nasdaq Composite indexes slightly rose at the start of Tuesday’s session before erasing gains within the hour and trading around 0.5% and 0.8% lower, respectively. Bitcoin and ether similarly posted modest gains followed by minimal losses, losing 0.3% and 0.5%, respectively. 

Tom Essaye, founder of Sevens Report Research, is watching three key areas to determine if and when the bear market is over: easing lockdowns in China, inflation peaks and the Federal Reserve hits peak hawkishness, and declining geopolitical tensions. None of these indicators have been achieved yet, but Essaye thinks progress is being made. 

“We are starting the year in a better position than markets have been in over the past several months, and if positive progress towards these keys to a bottom continue, we’ll find ourselves closer to saying the bottom is in, and aggressively deploying capital,” Essaye said. 

China needs to see Covid cases drop and the Purchasing Managers’ Index break 50 before the markets turn around, Essaye said. An easing of China’s “zero Covid” policy and increased efforts to boost growth have helped, but we are not there yet, he added. 

The Fed is set to meet at the end of the month, and markets are increasingly confident that slowing inflation and gains in the job market will push central bankers to opt for a 25 basis point hike, according to data from CME Group. The peak hawkishness Essaye is watching for probably will not come until the middle of the year, he said. 

Finally, Essaye said, oil and other commodities have to get back to pre-Russia and Ukraine War levels to prove global tensions have deescalated. 

Digital asset traders holding on to the idea of cryptocurrencies as an uncorrelated asset class had a rude awakening in 2022, and the pattern isn’t likely to let up anytime soon, analysts said. Crypto investors hoping to make up for losses in 2022 — bitcoin and ether both ended the year more than 65% lower — need to continue to keep an eye on macroeconomic trends. 

“[In 2022,] bitcoin’s correlation with the S&P 500 hit both an all time high and dropped to 15-month lows,” research analysts from Kaiko wrote in a note Tuesday. “The lows were reached during FTX’s collapse, while the highs emerged in the final week of December. This is the best evidence yet that macro is back.”

Global interest rate hikes have helped create the least friendly macro environment for risk assets in years, as demonstrated by a dramatic drawdown for crypto, equities and everything in between, Kaiko analysts added.

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