In our recent monthly market calls, we have talked about the strong possibility for a significant market rally. We saw a number of positive signs under the surface while the market tested a logical area of price support. At the same time, investor sentiment and positioning were at historically negative levels. Those factors have resulted in a 6.2% rally in the S&P 500 from October 1st, as we write this. We think this rally can continue, perhaps even through the end of the year. There is also some evidence that the Federal Reserve is considering pausing its rate hike program; this change would likely be viewed as another positive for the market. This recent advance shows why we continually urged investors not to get too negative when the markets looked particularly bleak earlier in the fall.
Ultimately, our indicators do not suggest that enough has been resolved to allow the market to move higher sustainably quite yet. While corporate earnings have been strong thus far, signs continue to point to downward revisions in 2023. In short, not enough time has passed to observe the effects of recent rate hikes on the broader economy. Also, we need to see more improvement in some of our key longer-term technical indicators. For these reasons, we continue to advocate caution and hold a higher amount of cash than normal for most clients. We believe the eventual recovery is likely to be slower than recent rebounds. But just as winter is sure to be followed by spring, this bear market will be followed by a new bull market. As always, we will keep monitoring our indicators and strive to invest appropriately for current market conditions.
