In spite of recent volatility due to the debt ceiling drama, stocks have performed well this year.

Although the performance has been a bit uneven. YTD the Dow is only up 0.84%, while the S&P is up 9.18%, and the Nasdaq is up 20.9%.

But when you step back and look at them all from their bear market low close last year, they even out with the Dow up 16.4%, the S&P up 17.2%, and the Nasdaq up 23.9%.

Additionally, the Nasdaq officially exited their bear market earlier this month (5/8/23), after notching a gain of more than 20% from last year’s bear market low close. And the Nasdaq is now in a new bull market.

It should be noted too that the Dow exited their bear market as well. They actually exited their bear market late last year (11/30/22) when they closed up by 20% from their bear market low close. Granted, they pulled back shortly after crossing that threshold. But they are back within striking distance (2.80% away) of eclipsing that mark again.

The S&P has not crossed the 20% threshold just yet. But they only need another 3.74% to exit their bear market and begin a new bull.

And it’s looking more and more likely that they’ll get there sooner rather than later.

Especially when you add in the favorable statistical trends of 1) the 4-year Presidential Cycle which shows that year 3 (that’s 2023), is the best year of all 4 years (since 1950, stocks have always gone up in the year after midterms, with an average 12-month forward return of 18.6%), and 2) over the last 60 years, if a bear market in the S&P goes down by -25% or more (the S&P was down by -25.4% last year between their bull market high close and their bear market low close), stocks go up on average of 38% a year later (those stats encompass 9 bear markets, with 8 of those seeing stocks up the next year).

Here are some additional reasons why 2023 is shaping up to be a historic bull market.

Peak Inflation Is Behind Us

The previous week’s better than expected Consumer Price Index (CPI), and Producer Price Index (PPI) confirmed that inflation was on the decline.

It’s still too high. But it’s definitely moderating with core (ex-food & energy) CPI (retail inflation) at 5.5% y/y vs. last year’s peak of 6.6%, while core PPI (wholesale inflation) came in at 3.2% y/y vs. last year’s peak of 8.2%.

That also underscored the latest Personal Consumption Expenditures (PCE) index (the Fed’s preferred inflation indicator), which showed core inflation at 4.7% y/y vs. last year’s peak of 5.3%.

With inflation on the decline, and the Fed Funds rate at a midpoint of 5.13% (in line with the Fed’s terminal rate forecast), it appears the Fed is likely to pause come their next Fed meeting in June.

Moreover, while the Fed has said they are not expecting to cut rates until next year, they are forecasting a Fed Funds rate of 4.1% in 2024, and 3.1% in 2025, which means a full 100 basis point rate cut next year, and another 100 bps cut in 2025.

And all of that is bullish for the market.

The Outlook Is For Growth

The recession of 2022 has come and gone.

And while some continue to speculate that maybe we could see one in late 2023, the market, at the moment, does not seem to think so.

Q1 GDP, which was previously forecast at 1.1%, was just upgraded to 1.3% in their latest report.

And the Federal Reserve Bank of Atlanta, via their GDP Now forecast, is estimating Q2 GDP to come in even higher at 2.9%.

It’s hard to make a case for a recession (defined as 2 quarters in a row of negative GDP), when the economy is expanding.

In fact, Fed Chair, Jerome Powell, at their last FOMC meeting earlier this month, said he thought the “case of avoiding a recession is, in my view, more likely than that of having a recession.”

If we do see growth slow later in the year, it’s important to note that slower growth is still growth.

But it’s also worth noting that personal incomes are hovering near all-time highs. An important point when you consider that 70% of our GDP is driven by consumer spending.

And with the jobs market still so tight, that continues to underpin the economy.

Interestingly, Mr. Powell seemed to marvel at the robust labor market, commenting with seeming incredulity that rates have risen to 5% while the unemployment rate is still only 3.5%.

None of that is consistent with a recession, and why the outlook is for growth.

Stocks Are Undervalued

Let’s also not forget that valuations are down.

While the P/E ratio for the S&P has risen from last year’s lows, they are still down sharply from 2021’s peak, and are below their five-year average.

And that makes stocks a bargain.

At the same time, the earnings outlook is one of stability.

Not only did this past earnings season come in better than expected, companies provided reassuring enough guidance for the coming quarters, with many upping their outlook.

While few are predicting rip-roaring sales and earnings (although, you might have a different take if you were looking at Nvidia and other companies keyed into the transformational generative AI industry), there are plenty of stocks and industries forecasting outsized growth.

You just have to know where to look.

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