In a year of slippery markets, tape proved surprisingly sticky. Certainly, the indexes lost ground last week, with the S&P 500 slipping 3.4 percent from where skeptics might have expected, just above 4,000, marking an invisible but so far impenetrable decline since Jan. 3. . market peak. However, where it spent most of the past week and indeed the past month was a familiar spot between 3900 and 4000, closing at 3934. That’s within half a percent of where it stood on Nov. 10, when the stock rose for the day. a softer-than-forecast consumer price index release. This is where the index was nearly seven months ago, on May 12. In the seven months since the Federal Reserve raised rates by another three full percentage points, S&P 500 earnings forecasts for 2023 fell 8%, the Fed’s balance sheet shrank by $400 billion and bitcoin prices — to name a few. big crypto dealers – crashed. Assessing the risk/reward tradeoff for the market heading into 2023, whether this stickiness is more like a strength that commands respect, or a comfort that advises caution. Furthermore, it means making judgments about whether the current prevailing view that a recession is expected by mid-2023 is both correct and not yet priced in financial markets. Mixed messages Markets’ indecision reflects the mixed macro messages swirling around. Long-term Treasury yields have fallen sharply over the past month, from 4.2% on the 10-year to below 3.5% last week, as bond traders shrugged off inflation fears — and received strong monthly wage growth. number and upside surprise to producer price inflation – raising the economic growth forecast to the highest concern status. Adam Crisafulli, founder of investment research firm Vital Knowledge, says: “My main goal for this market is to determine whether the outlook for inflation is improving faster than the outlook for growth and earnings is deteriorating — if that continues, it’s hard to be a super bear.” Pictured here As the correlation shows, the path to a positive outcome is a delicate one, with many variables having to cooperate in time. It’s certainly plausible, at least relative to how markets are priced. Many strategists and risk managers, however, believe that the decline in leading economic indicators and sharply inverted Treasury yield curves are plausible. — a sometimes worrisome harbinger of an economic downturn — are perfectly poised to take a bearish position. Bank stocks hit new relative lows against the broader market, and oil defies energy bulls to face a year-on-year decline. It paints a picture of a broadly slowing economy. shows, but the starting point was such a high level of activity—goods demand, consumer savings, corporate profitability, employment—that conditions could get worse for a while without really getting worse. . As just one example, Bank of America customer data shows that while credit card usage has increased slightly this year, borrowers are still using a significantly smaller percentage of their pre-Covid credit limits. It ranges from continued jobless claims (a new record high last week, but lower than almost any time between 1973 and 2020) to the still-large “excess savings” in bank accounts and the broad ratio of households corresponds to other indicators. financial obligations related to disposable income. Everything is more difficult than last year, but not so difficult compared to normal times. Meanwhile, there are offsets: Falling Treasury yields have pushed mortgage rates down from recent highs, while gasoline prices have fallen by a third from their mid-year highs. What is the price? The macro debate will not be resolved for some time. While the possibility of a recession on the horizon cannot be ruled out in advance, it will probably continue to keep animal spirits at bay, and the struggle is to figure out what is valued. It’s worth going back to read about it. The moment the S&P 500 first rose to its current level below 3,950: about 21 months ago, March 2021. How the valuation of the Nasdaq 100, the S&P 500, and the equal-weighted version of the S&P 500 have changed since then. Even now, the current setup doesn’t fit anyone’s definition of a cheap stock market that uses a high margin of safety. Yes, as almost everyone has said, there is downside risk to earnings forecasts for next year, although cost-cutting by spooked CEOs, a falling US dollar and overall high levels of nominal GDP may prevent cuts from going too deep. Again, this shows an overvaluation to the extent that it is still in the market, embedded in the Nasdaq and S&P’s largest stocks. Wall Street has a way of writing the story of 2022 as one long year of resets and paybacks. : several years of delayed interest rate normalization implemented over nine months, overvaluation in speculative technology and cryptocurrency, recovery of supply chains, return to moderate demand for hard goods. However, many market hurdlers do not apply this argument as a reason to herald brighter times in 2023. There is a fairly tight consensus among strategists that the S&P 500 will see a bad run to new bear-market lows or no upside. Before recovering after a recession in early 2023, the Fed becomes a friend or both. Just because this view is popular doesn’t mean it isn’t plausible. In fact, it is famous for being convincing. But if nothing else, it shows that a dangerous complacency is not among them for all the challenges facing the so far resilient market.