The end of another bear market rally and what awaits U.S. stock markets in 2023

Stock markets are off to a very good start this year, with the S&P500 up nearly 10% and the Nasdaq up nearly 20% after 2022, their worst year since 2008

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Stock markets have had a very good start to the year, with the S&P500 up nearly 10% and the Nasdaq up nearly 20% after 2022, their worst year since 2008. However, U.S. stock indices ended last week with big losses after a string of strong labor market data and worse-than-expected inflation. The S&P 500 fell 2.7% to close at 3970, its worst week since December 9. And the Nasdaq closed 3.3% lower, falling to 11,394 points.
A recent Bank of America survey found that two-thirds of investment fund managers believe a bear market rally is off to a quick start in 2023. After prolonged declines during a bear market, recovery phases occur, leading to a sharp rebound in stock prices. These short-term rebounds can last days, weeks, and sometimes months before a deeper correction begins.

Bear market rallies are deceptive to investors, as short-term spikes in stock prices can seem like signs of a rebound after a prolonged downtrend. After a surge at the beginning of the year, U.S. markets are now in a correction, mostly related to the fact that the Fed may have to keep rates higher longer to beat inflation.

Volatility will remain quite high through the middle of the year, not inspiring confidence in a full-blown recovery. The S&P500 might even hit 4,200 again against the current level in the near term, but the rally is unlikely to last as earnings will disappoint investors.