Analysts Warn Investors to Taper Expectations for 2023 Returns

Equities and cryptos have no doubt had a strong start to the year, but analysts urge traders not to bank on a sustained rally. 

With the S&P 500 and Nasdaq Composites ending 2022 almost 20% and 34% lower, respectively, investors have welcomed the explosive start to the year. The S&P 500 has gained nearly 8% year-to-date, while the tech-heavy Nasdaq Composite is up close to 15% so far in 2023. Bitcoin and ether, which also closed 2022 in the double-digit red, have also reversed course this year, rallying around 36% and 35%, respectively. 

But a month and change of positive trading sessions isn’t enough to say markets are definitively in the clear, Jessica Rabe, co-founder of DataTrek Research, said in a note Thursday. If 2022’s returns had not been quite so bad, stocks would have a much better chance of rebounding this year, based on past data, Rabe said. 

“After the index is down double digits like last year, the odds of it being positive this year are essentially a coin flip, and the returns aren’t nearly as promising as they would have been had the S&P ended 2022 down less than 10 percent,” Rabe wrote. 

Given the uncertainty surrounding the Federal Reserve and its future interest rate decisions, markets are poised for volatility, Rabe added. The Fed is going to keep a close eye on unemployment numbers and job openings going forward to determine if and when slower-paced increases will be warranted, central bank head Jerome Powell has stressed in recent weeks, urging investors to be cautious. 

“The reality is we’re going to react to the data,” Powell said during an appearance at the Economic Club in Washington, D.C. Tuesday. “So if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in.”

While analysts may be calling for risk-off sentiment for markets, so far, cryptos have been able to hold on to gains. Sehaj Singh, an investment associate at Pantera, believes the next bull cycle for digital assets is already here, “regardless of what happens in the interest-rate-sensitive asset classes.” 

“The decline from November 2021 to November 2022 was the median of the typical cycle,” Singh said in Pantera’s most recent blockchain letter this week. “This is the only bear market to more than completely wipe out the previous bull market. In this case giving back 136% of the previous rally.”

For now, traders and analysts will be keeping an eye on Thursday’s initial weekly jobless claims report, which showed 196,000 versus the expected 190,000. 

Markets should be poised for a higher open, as they want to see claims begin to rise over the coming weeks, otherwise it’ll imply the labor market remains much, much too tight, Tom Essaye, founder of Sevens Report Research, said.

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