The stock market rally which began in October continued through November. It is the fifth rally attempt this year. The Dow pushed higher and closed on November 30th above the peak it reached last August. After a seven week run, the Dow attained its highest level in seven months. The index rallied 20% off the bottom that was set on October 13th and has recovered about 62% of its year-to-date losses.
The S&P 500 and the tech-heavy Nasdaq composite are also moving up, but not with the same strength as the Dow Jones Index. It is interesting to watch this recent out-performance of the Dow. It is an index of only 30 stocks and most fall in the value stock category. The lag in these larger indexes is due to the concentration in large technology companies which have been hit very hard this year. The Nasdaq composite is mainly a growth stock index with a heavy weighting to technology companies. The S&P 500 is more diversified, but because it is cap-weighted the companies with the heaviest weighting on this index include the large technology companies. The former leaders have become laggards in this market recovery.
We observed leadership rotating to value stocks as early as the 4th quarter of 2021 and value stocks continue to lead this recovery. Rising interest rates create a challenging environment for growth companies. Many missed third quarter earnings and downgraded their prospects for 2023.
On the other hand, some value stocks are benefiting from the current economic environment. Rising interest rates favor stocks in the financial sector such as banks and insurance companies. Energy stocks continue to do well and industrials and basic materials are improving. Healthcare and consumer staples also include some market leaders.
As the rally continues, more individual stocks are reaching all-time highs. In October five of the thirty Dow stocks notched all-time highs and in November four more joined that list. Watching an increasing number of stocks move to a positive trend is very encouraging. For this rally to be sustainable, we need to see increased breadth across all industry sectors.
There continue to be forecasts of a coming recession in 2023 and many worry that this may negatively impact the stock market. The Federal Reserve has a difficult task to get inflation under control and not send the economy into a recession. Short term interest rates, its main tool, continue to rise. The question is how high will they go? The Fed meets again next week and investors will listen for any clues about when the board will slow down interest rate increases.
A moderate recession may not derail this market recovery because the market looks six to nine months into the future. By the time a recession is identified, the market is focusing on recovery. At the same time, it is prudent to recognize that a prolonged recession could stall the market and send it down again.
Because we can’t predict the future we are prepared with a plan if stocks fall again. We follow price movement because price reveals supply and demand and points to the market leaders. We use protective stops to prevent large losses. In a year like 2022 it is not possible to avoid all losses but keeping losses to a minimum is a key to eventual recovery.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.