A short-term top is in place
Christopher Norwood • December 19, 2022

Profitable trading is hard

Market Update

The S&P 500 lost 2.1% last week and closed at 3852.36. The Nasdaq lost 2.7% and the Dow declined 1.7%. It was the second week in a row that all three indexes declined. The S&P did take another run at the upper end of the trading channel on Tuesday. (See chart above) We wrote last week that, “Based on technical indicators we should get another run at the upper end of the trading channel this week or next.” The S&P poked above the trading channel Tuesday but once again couldn’t close above it. The same failure also occurred on 1 December. The 100-day failed to provide support this time. The S&P sliced through the moving average on Thursday with a follow-through on Friday. The 100-day had held support five trading days in a row from the 6th to the 12th before bouncing. A short-term top is in place and the odds favor more downside over the next few weeks.


The sell-off Thursday and Friday started Wednesday afternoon. The S&P lost about 1.4% from the time of the Fed’s rate hike announcement/press conference to the close. The Fed and Chairman Powell were more hawkish than anticipated. We wrote last week that, “A more hawkish than expected Fed announcement will also cause a sell-off.” It did exactly that starting shortly after the beginning of the Fed’s press conference.


The S&P 500 is down 18% year-to-date, despite rallying 14.1% from its October 12th low. The Nasdaq is down 30%. The U.S. Aggregate Bond index (AGG) is down 11.1%. It’s been a tough year for both stocks and bonds. The coming year may see higher-than-normal volatility. A growing consensus sees a falling stock market in the first half and recovery in the second. Bonds are being touted by investment strategists as well. A growing chorus is singing their praises for 2023. Some are suggesting they will outperform stocks next year.


The economy is expected to enter a recession in 2023. The conference board is forecasting 0.0% GDP growth in 2023. The Federal Reserve is forecasting 0.5% GDP growth. Earnings forecasts by eight investment strategists polled by Barron’s range from $199 to $231. The same strategists have an average price target of 4233 for the S&P 500 at year-end 2023. The average price target is 9% above the current level.


The Conference Board and the Fed are all but predicting a recession for 2023. Earnings forecasts are too high if the economy does fall into recession. The consensus among market strategists is for earnings growth of 5% in 2023 and 9% in 2024. It seems unlikely that earnings will grow by 5% next year. It is more likely that earnings will fall 10% to 20% as the economy enters a recession. Investors may look past a decline in earnings in 2023 in anticipation of better earnings in 2024. They may not though. The risk entering 2023 is to the downside for stocks. Bonds should perform well as the Fed’s tightening cycle winds down.


Norwood Economics is forecasting a mild recession in the second half of 2023. The stock market should retest the October lows by the summer. It may fall further depending on earnings, inflation, and interest rates. Regardless, we expect to be buying good companies on sale throughout the year.


Economic Indicators

The economic indicators last week continued to show a slowing economy. The S&P U.S. manufacturing PMI fell to 46.2 in December from 47.7 the prior month. The S&P U.S. services PMI fell to 44.4 from 46.2. Numbers below 50 represent contraction. The industrial production index dropped 0.2% in November after declining 0.1% in October. Retail sales fell 0.6% in November after rising 1.3% in October.


The inflation data was favorable and that led to a rally on Tuesday. The Fed’s hawkishness Wednesday wiped out the Tuesday rally and then some. Investors are concerned the economy will fall into recession next year as the Fed raises rates to stamp out inflation. The economic numbers are supporting that scenario.


Investing and Market Timing

I had a client and friend email me after last week’s newsletter came out. He wanted to know if we were the investors that weren’t listening (to the message of an inverted yield curve). It’s a fair question. Our philosophy is to buy undervalued companies whenever we find them regardless of our market outlook. There is a reason I don’t try to market time. I’m no good at it. Most investors, professional and otherwise, aren’t good at it either. Or so the data shows.


I can tell you in broad strokes what the stock market is likely to do over the next 12 to 18 months. It is likely that we have another sell-off in the first part of next year. We might not though. Should the sell-off come it might stop at or near the October low. It might not though. It might continue down to 3,000-3,200 as stocks anticipate a recession and a 20% decline in earnings. It might not though. It is the uncertainty that makes trading difficult. It is the uncertainty that leads to losing trades.


A general idea of what the market might do isn't enough to add excess risk-adjusted return. When do you establish a position? When do you stop loss out? When do you take profits? It’s the execution of the trading strategy that is so often botched. What you learn after 30 years of investing is that it is difficult to earn excess return by trading. The easiest way to earn excess return is by buying good companies on sale. You need to understand how to value a business. You need patience. You need to be okay with lumpy returns and short-term losses. You will earn excess risk-adjusted return if you can do those things.


Bear markets end and bull markets start. A five-year investing horizon is a luxury. You shouldn’t squander it with short-term trading. Yes, our base case is a decline of 15% to 20% in the first half of next year. Knowing that doesn’t change what we want to do, which is buy good companies on sale. It’s the best way to earn an above-average risk-adjusted return over five- and ten-year periods. And that is our goal for clients.


Regards,



Christopher R Norwood, CFA


Chief Market Strategist


By Christopher Norwood October 20, 2025
Executive Summary The S&P 500 rose 1.7% last week to finish at 6664.01 The Nasdaq & the Dow Jones rose as well last week We had an inside day last Monday, then an inside week Earnings season is here The four credit events might snowball into something more serious Credit spreads have started to react, widening over the last two weeks Bond yields fell (yields down, price up) last week The dollar index is also falling The Federal Reserve has been draining excess reserves from the system since 2022 It appears as if the Fed has no choice but to end its Quantitative Tightening (QT) program The Stock Market The S&P 500 rose 1.7% last week to finish at 6664.01. The Nasdaq 100 was up 2.4% and the Dow was up around 1.5%.
By Christopher Norwood October 13, 2025
Executive Summary The S&P 500, Nasdaq & the Dow Jones fell last week President Trump tanked the market Friday with a post about trade talk troubles with China The S&P 500 still has a lot of momentum, though Bond investors aren’t expecting a recession any time soon The Atlanta Fed GDPNow tool is estimating 3.8% real GDP growth for Q3 The AI boom is increasingly dependent on circular cash flows The U.S. stock market has a lot of exposure to AI The Stock Market
By Christopher Norwood October 6, 2025
Executive Summary The S&P 500 rose 1.1% to close the week at 6715.79 The Nasdaq was down 0.3% last week The Dow Jones Industrial Average was up 1.99%. The government shutdown materialized on Wednesday The Fed is expected to cut the funds rate by another quarter point in October Unemployment isn’t rising, and consumers are still spending Recession red flags The last 18 years have been unusual A recession is not Norwood Economics’ base case
By Christopher Norwood September 29, 2025
Executive Summary The S&P 500 fell 0.3% last week to finish at 6,643.66 The Dow, Nasdaq, and Tech sector ended lower as well The S&P average annual total return is 7.9% since the 2000 market peak The economy grew 3.8% in Q2 (third estimate), up from the prior 3.3% second estimate Financial conditions remain loose The 10-year Treasury yield has little room to fall from current levels The elderly and poor suffer most from the impacts of inflation Norwood Economics manages diversified portfolios This time is NOT different The S&P might see negative returns over the next decade Economic growth is the lowest in the past 25 years There are no piles of cash sitting on the sidelines The Stock Market
By Christopher Norwood September 22, 2025
Executive Summary The S&P 500 rose 1.2% last week to finish at 6,664.36 The S&P 500 is up 13.31% year-to-date The S&P is expensive The Fed updated its “Dot Plot” The 10-year yield rose last week despite the Fed’s rate cut The Fed is signaling at least two more rate cuts by year's end A pullback of 10% or so wouldn’t be unusual, but there’s no data signaling recession yet The top ten most expensive S&P 500 companies make up over 39% of the market cap UBS economists estimate a 93% chance that the US will slip into a recession this year Investors should review their portfolios before the next bear market The Stock Market
By Christopher Norwood September 15, 2025
Executive Summary The S&P 500 rose 1.6% last week to finish at 6,584.3 The stock market rises long-term due to earnings growth and interest rates A stock is ownership in a business Investors are willing to pay more for a dollar’s worth of earnings today than in the past Profit margins are already near record highs The Volatility Index (VIX) closed the week at 14.76 The market is setting new highs The CME FedWatch tool places the odds at 100% for a rate cut Wednesday The August jobs report and last week’s jobs revision are driving rate cut expectations Cutting the fed funds rate isn’t the answer to slower job growth Higher long-term rates will negate any benefit from a rate cut The Stock Market
By Christopher Norwood September 8, 2025
Executive Summary The S&P 500 fell 0.3% last week to finish at 6,481.50 The CAPE ratio is currently at its second highest reading ever Valuation is a lousy timing mechanism, but an excellent predictor of future returns Interest rates declined last week The 2-Year Treasury yield fell to 3.51% by the close on Friday The 10-Year Treasury yield also fell, ending the week at 4.10%. The CME FedWatch tool has the odds at 73% of a Fed funds rate of 3.50% to 3.75% or lower by year's end The weak jobs report on Friday showed that only 22,000 new jobs were added in August Unemployment rose to 4.3% from 4.2%. The aggregate weekly payrolls index fell to 4.4% in August “We’re back in that world of uncertainty," states Art Hogan, chief market strategist at B. Riley Wealth  The Stock Market
By Christopher Norwood September 2, 2025
Executive Summary The S&P 500 finished down 0.1% at 6,460.26 last week The S&P is up 9.8% on the year. Industrials and Communication Services are leading the way Personal income rose in line with expectations for July, climbing 0.4% up from 0.3% the prior month A weak payroll number on 5 September means a Fed rate cut on 17 September Unemployment is expected to rise, but it is still low relative to history Wage growth close to 4% will make it hard for inflation to fall to 2% The predictions market has the odds of a recession at 8% The ICE BofA US High Yield Index spread is near all-time lows A bear steepener is increasingly likely. A bear steepener is when the yield curve falls at the short end but rises at the long end
By Christopher Norwood August 25, 2025
Executive Summary The S&P 500 rose 0.3% last week to close at 6466.91 The CME FedWatch tool initially raised the chances of a September rate cut to 84.7% The stock and bond markets opted to buy Fed Chairman Powell’s Friday morning speech Investors now seem certain that the Fed will start cutting again The current five-year breakeven is 2.48% The 10-year breakeven is 2.41% The core Consumer Price Index (CPI) is 3.1% Disinflation appears to be over as the inflation rate is no longer falling The St Louis Fed’s Financial Stress Index is negative 0.8153. A negative number means below-average financial market stress The real 10-year interest rate is falling. Money is getting cheaper. The Fed’s balance sheet is shrinking, but is still 22% of GDP An indebted economy can’t withstand high interest rates  The Stock Market
By Christopher Norwood August 18, 2025
Executive Summary The S&P 500 rose 1.01% last week to finish at 6,449.80 The stock market keeps hitting new highs Market strategists are expecting earnings growth to accelerate in 2026 Margins remain near record highs Corporate profit margins will likely take a hit from tariffs Passing tariff costs on to the consumer means raising prices Core CPI rose by 0.3% in July The PPI jumped 0.9% last month, the largest monthly increase in more than three years Buffett says it’s dangerous when the market cap rises to more than 140% of GDP. Currently, the ratio is above 200%. The massive increase in the Fed's balance sheet over the last 25 years has led to financial asset price inflation The Stock Market