Stock-market investors We hope for some relief after an extremely volatile 2022 have history — and options traders — on their side. 

The Federal Reserve’s slowing inflation is supporting speculation that it will soon end interest-rate increases. Equity-derivative trader are now being questioned. expecting It’s a respite from the market turmoil of last year. That’s driven the so-called volatility curve — a plot that shows expectations for the severity of price swings in the months ahead — lower at every point than it was a year ago. 

Other historical data points also suggest that the optimism of the past two weeks isn’t misplaced. There are many. have There have only been two annual stock-market falls in a row since 1950. These were during the depression of the 1970s, and then after the burst of the dotcom bubble, which lasted for three years. According to Wall Street strategists, nothing along these lines can be expected for 2023.

“With how bad last year was, there is so much bad news that’s likely already priced into markets,” Ryan Detrick was chief market strategist at Carson Group. According to him, the US could avoid recession. “major positive catalyst” Stocks “We’re seeing steps in the right direction with inflation. That’s the key to the whole puzzle.”

You can, of course. investors shouldn’t expect completely smooth sailing You can find it here. In fact, the January after a double-digit yearly slump historically has been a rough month for the S&P 500 Index. 

Still, the S&P 500 rose 2.7% last week and is up more than 4% for the year. According to the Labor Department, Thursday’s report showed that the consumer price index dropped The December reading was down from the previous month and saw its lowest annual rise since October 2021. These data are widely believed to give Fed officials the opportunity to slow down the rate of increase at their February meeting.

Those stock-market gains are welcome news for equity bulls after the S&P 500 posted a more than 19% loss in 2022, the worst hit since the 2008 financial crisis. The good news is such down years are usually followed by a rebound: The S&P 500 has rallied back from them by an average of 15% in the next 12 months, according to data since 1950 that was compiled by Carson Group.

“Markets may have good reasons to see the glass half full on inflation and dismiss hawkish” Emmanuel Cau is a strategist who said that the central bank rhetoric was important. Barclays Plc

However, stockholders should not be afraid. investorsAccording to a, he pulled in $2.6 billion from US equity fund during the week ending Jan. 11. Citigroup Inc. note citing EPFR Global data. 

It’s possible the Fed could ultimately defy the market’s expectations. Officials are suggesting that traders were wrong to expect interest rate reductions later in the year. Even more corporate earnings reports, including the most recent round, are only beginning to be made public. their Take your own risks 

Those skeptical January’s gains will be sustained can also point to their Your precedent. These are the occasions when markets have failed to perform. have Stocks experienced double-digit losses in the past year. have It happened three times in the initial month of each year.

But for now, traders at the very least aren’t expecting Any major shocks. The month’s two major economic reports — the employment figures and the consumer-price index — have Already released data showed growth continuing to be strong and that inflation is decreasing. 

The Cboe VIX Index — a gauge of projected price swings in the S&P 500 that normally moves in the opposite direction of the index — finished last week at around 18, the lowest since last January.

Institutional investors have Coverage their The number of short equity bets placed in the recent weeks and early this month has risen their net-long position to the highest since May 2022, Ned Davis Research’s analysis of CFTC data show.

“If there is a recession where it lasts about two quarters, by the time we get to the second half of the year, markets should be pricing in a recovery,” Ed Clissold is the chief US strategist for Ned Davis Research. “If there continues to be favorable inflation data and if earnings come in pretty good, you could make the case that hedge funds will continue to cover their short positions, which would be pretty good fuel for the rally to continue.”

Get The Trust Factor weekly newsletter, which focuses on what leaders need in order to thrive. It will teach you how to build trust and navigate your company. Get signed up.