A Stock Market Crash In 2023?

A new long term time cycle is starting in 2023. Many investors are anxious about a stock market crash to start in 2023. Contrary to what many pundits try to make you believe there is no 50% drop in markets underway, on the contrary. Our overall market forecast 2023 is all about a new start after the market had its ‘reset moment’ in 2022. Different sectors of the market will rise at different moments in time in 2023. There will still be volatility in 2023 but the level should come down. Let’s put it this way, there was plenty of opportunity in 2022 to have a stock market crash, everything was in place for this to happen, it didn’t happen. It won’t happen in 2023 and this call is in line with the findings from the Dow Jones 100 year chart: no stock market crash in 2023. The market will resume its uptrend not later than the first quarter of 2023 (it not sooner).

[Editorial note: On Nov 22nd, our team added 3 more points after point #10 in the original article. Points 11 till 13 were added as additional data points that underpin the thesis that there will not be a stock market crash in 2023. Moreover, on December 4th, multiple charts were updated. Moreover, on December 24th, we added point 15 which is about earnings estimates and how this data point does not provide evidence of a stock market crash.]

The stock market crash topic is a pretty complex. There are many data points that may be relevant, there are even more that seem relevant. However, the relevant data points are limited.

The beauty of analyzing markets and forecasting a stock market crash is that hardly anyone knows exactly which data points are relevant.

That’s why we look at the topic the stock market crash in 2023, to crash or not to crash, in 10 different ways. No matter how we look, we continue to see sufficient evidence that there won’t be a stock market crash in 2023.

This does not mean that there won’t be volatility, it does not mean that there won’t be (sharp) pullbacks.

What we are saying: the fear of investors for markets to come down a lot in 2023 is not justified, at least what our charts are saying at this very point in time. Every call is subject to change if the underlying data points change.

A few thoughts on stock market crashes

It is so easy nowadays to use the word ‘stock market crash’. Twitter, social media, financial media is full of ‘crash’ predictions and the likes.

If you look deeper into the number of real stock market crashes you will find out the likelihood of one to occur is extremely low. Wikipedia says that there are only 4 crashes since 1900:

Panic of 1907
Wall Street Crash of 192
October 19, 1987 (aka Black Monday)
Crash of 2008–2009

Note that the 2000 dotcom crash does not qualify as a stock market crash. Why? Because it was only the NASDAQ really crashing. The other broad indexes corrected significantly but they did not crash!

1. Volatility coming down, no market crash in sight

As we head into 2023, we can see how the volatility index VIX is setting a series of lower highs. It is also setting a series of higher lows.

We believe that the former is more important and the dominant force in this market.

The market could have had its stock market crash moment, particularly in 2022, with so many opportunities to push VIX way above 40 points, in the 50ies and 60ies, which is the real stock market crash area. It didn’t happen.

The persistently elevated volatility levels, though not extremely high to trigger a stock market crash, is what is causing investors to be very afraid and uncertain. This results in irrational thoughts, simply because emotions are taking over control of the mind. That is the dynamic of markets in 2022 and the reason why so many investors are anticipating a stock market crash in 2023.

2. Inflation will decelerate in 2023

Inflation readings are currently still high, but that’s y-o-y inflation readings.

When you look at m-o-m readings, inflation is decelerating even before 2023 kicks off.

Bespoke Invest created this chart with future CPI scenarios in different colors.

Let’s think worst case scenario: m-o-m inflation readings of .4%. Even in that case, the y-o-y inflation will fall to 4.5% by May of 2023.
In the ‘base case scenario’, with m-o-m inflation readings of .2%, the y-o-y inflation will be close to 2% by May of 2023.

The market, as a forward looking mechanism, will start reacting to this new reality not later than the first quarter of 2023.

3. Inflation expectations have likely bottomed

Inflation expectations came down a lot in 2022. That’s because of the tightening by the Fed and other monetary policy makers around the world.

The Inflation expectations chart, TIP ETF, says it all. From our gold forecast 2023:

Inflation expectations expressed by TIP ETF came down in a dramatic fashion. We don’t expect this trend to continue in 2023 especially since monetary policies are close to being stretched in terms of rate hikes. Moreover, TIP came down to a long term trendline (support) which connects the lows of the epic 2008/9 and 2020 crashes.

Indeed, it is reasonable to expect that inflation expectations are in a bottoming process, one that might take a few months to complete. Similar to 2008, 2018, 2020, this should coincide with a bottom in markets.

No stock market crash in 2023 unless TIP ETF is going to close for more than 3 consecutive months below 102 points.

4. The chart: a bullish reversal, not a market crash

If we look at the topic of a potential stock market crash from the chart’s perspective we see the opposite: a double bottom setup.

This looks like a really strong bullish reversal, not a setup for a stock market crash.

Moreover, the October lows coincide with the 2020 breakout (also a bullish W reversal in the period Sept/Oct of 2020).

Invalidation: if the October lows are taken out, the bullish reversal will invalidate, in all other cases the bullish outcome will be dominant.

5. S&P 500 forward earnings

S&P 500 forward earnings rose to a record high in June week and has been relatively flat below that peak since then. The S&P 500 is determined by its forward earnings multiplied by its forward P/E. The former is determined by industry analysts, while the latter is determined by investors. So far, forward earnings has been moving sideways, rather than diving as it invariably does during recessions as analysts—who rarely see recessions coming—scramble to slash their earnings estimates.

From Yardeni research:

In October, industry analysts did continue to shave their earnings-per-share estimates for the next five quarters from Q4-2022 through Q4-2023. Nevertheless, their annual estimate for 2023 at $238.78 remained above their forward earnings of $235.58. At the start of the new year, forward earnings will be giving increasingly more weight to the analysts’ estimate for 2024, which is currently $258.03.

In order to respect the research work from Ed Yardeni, we will not include any of their charts but only encourage you to sign up for their quality research work.

6. Epic rotation until the start of 2023

If we go back to the S&P 500 chart there is one more finding worth sharing: the rotation.

What makes 2022 so unusual is the epic rotation between sectors.

Also, while the entire world is anticipating a recession, the recession is rolling from sector to sector. The recession is here, but in disguise simply because it is going from sector to sector (as opposed to the ‘classic’ big bang recession hitting all sectors).

7. Market breadth

Market breadth can never be read as a stand-alone data point.

Also, market breadth is not a timing indicator.

That said, the 25 year chart featuring new highs minus new lows on the NYSE Composite Index shows the persistence and intensity of the new lows that were printed in 2022. In October of 2022, the market also touched a key level which 7 out of 8 times marked the end of a stock market decline, the green bar on the first pane of the next chart.

Furthermore, the time duration of stocks below their 200 DMA in the NYSE Index is long, in historic terms, to qualify as a ‘sufficiently retraced pullback in markets’. This suggests that the pullback is about to run its course and no stock market crash should be expected.

8. Contrarian readings in the bull vs. bear ratio

From a contrarian perspective, the bull vs. bear ratio falling below 1 (more bears than bulls) is indicated in green on below historic chart. The periods in which the bull/bear ratio fell below 1 were a great time to add positions for the long term.

9. Consensus

The market will hardly ever behave in line with what the consensus thinks.

At this very point in time, a recession and hard landing is widely and wildly accepted as the only outcome.

There is too much consensus about this outcome.

Not only is the world already faced with a recession, a rotating one, as said before, but also is the market likely pricing in the recession effect.

This is consistent with the viewpoint that 2022 is a ‘reset year’ for markets which implies that a stock market crash will not hit the market in 2023. There was plenty of opportunity for this to happen prior to 2023.

10. Anecdotal & media

In closing, we look at a potential stock market crash from an anecdotal perspective. This is what we observe:

Among our readers and members, elevated levels of fear.
Financial media has arguably reached ‘peak fear’ when just looking at headlines. More about this in our recent post A Bottom In Markets Feels Ugly! This Is What It Looks Like.

Anecdotal evidence, when it reaches extreme levels, is often a good contrarian indicator if it is combined with other data points.

11. Consumer sentiment bad, consumer spending good

[Ed. note: this point was added on Nov 22nd.]

Consumer Sentiment is low, for sure. It ‘feels’ like a market crash might be underway.

However, even if consumers remain depressed, emotionally, it does not translate into their shopping behavior. It’s quite the opposite in fact, consumers continue shopping as evidenced by the retail sales chart.

A stock market crash in the last 2 decades came with falling consumer spending, not rising spending.

12. No stress in credit markets = no stock market crash

[Ed. note: this point was added on Nov 22nd.]

When a bear market is about to pick up in speed, it will be visible in the credit market. A yield spread is the ultimate proof of more pain ahead.

At present day, the spread between the high-yield corporate bond composite and the 10-year US Treasury has widened but it is not spiking the way it did during previous credit crunches.

13. An inflow into the USD from global investors, not just safe haven demand

[Ed. note: this point was added on Nov 22nd.]

2022 has been a very confusing year. Many dual (conflicting) events took place in markets. One of them is dual demand for the USD which explains why the USD has been so strong. As said in one of our other blog posts:

On the one hand, the USD has been rising as a safe haven. However, the USD has been rising as well because of its attractiveness against other markets globally.

With these massive amounts of cash hoarded comes a massive exodus whenever risk appetite returns. These Dollars will find their way to risk assets, sooner or later, simply because they were accumulated for investment purposes in the first place.

14. Broker/dealers and investment services are bullish

[Ed. note: this point was added on Dec 4th]

Broker/dealer stocks and investment services are completing a bullish reversal, going into 2023.

Similarly, investment services (as a stock market segment) are completing a bullish reversal.

If a stock market crash in 2023 was underway, both sectors would be bearish, not bullish, going into 2023.

15. EPS Estimates for S&P 500 companies now flat

[Ed. note: this point was added on Dec 24th]

One of the most fascinating charts that provides sufficient evidence that 2023 will not kick off with a stock market crash is EPS estimates. As seen on below chart, analysts revised down their 2023 earnings estimates over the course of the year, particularly as of the second quarter of 2022. Interestingly, at the start of 2023, the earnings estimates, both annual earnings and forward earnings, are now flat.

The way we interpret this data point is that analysts believe that the economic impact on earnings (think of inflation, recession fears, etc) did run its course.

If analysts were expecting a stock market crash in 2023, then this downtrend in annual and forward earnings would continue to decline.

In the meantime, instead of being concerned and anxious, you may want to prefer letting our algorithm do the hard work for you by auto-trading the S&P 500 >>

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