The recent rise in global liquidity has been a significant contributor to the market's performance so far this year.&nbsp; There is data that supports the possibility that the trend will continue in the next weeks; but, there are still a number of headwinds that might weigh on markets as we get closer to the conclusion of the first quarter and the second quarter.Throughout the course of the year, maintaining enough funding and liquidity will continue to be a primary concern, particularly for businesses experiencing rapid expansion (like crypto). According to our analysis, the shift toward a more expansionary global liquidity environment is the single most crucial factor that may spark a fresh bull run that can last for an extended period of time.In the previous quarter, which corresponded with the lows seen in October, the global liquidity cycle exhibited signals that it was bottoming out.Because the consequences of this reversal on financial markets often lag behind by anything from six to eighteen months, we are more positive about the second half of 2023 as well as 2024 and 2025.Check out our research titled "Markets Year Ahead" for additional information and specifics on the most important macro and market trends that we are watching for 2023.<h2>The beginning of the year shows positive signs</h2>The financial markets are likely to have a turbulent ride in 2023. This year has gotten off to a fantastic start for risky assets, with cryptocurrency leading the charge. One of the most important accelerators has been a rise in global liquidity, which has been primarily conducted by the People's Bank of China (PBoC) of China and, to a lesser degree, by the Federal Reserve. Even while "headline QT" is still going on, the liquidity from the latter is helping to boost money markets. As a result of the ongoing impasse in the United States over the debt limit, the Treasury General Account may continue to be depleted throughout the greater part of the first quarter. Both of these factors, which together are countering reductions in the Fed's balance sheet (shadow "QE"), have caused the RRP to begin seeing a flow of funds in the other direction.&nbsp; During the most recent episode of Bull vs. Bear, we spent a lot of time talking about this critical subject.The recent decline in the value of the dollar lends credence to the idea of a liquidity reversal. Since late September, the DXY index has declined 11%, reaching its high point about the same time that Fed funds predictions for December 2024 reached their high point.The strength of the dollar was a significant headwind for markets in 2017, therefore it should come as no surprise that the recent decline in the value of the dollar is providing support for risk assets. In fact, the DXY reached its high point around the same time that the SPX reached its low point.In a similar vein, the rebound in equity markets has been solely driven by price multiple expansion (rather than better profit expectations), which, once again, indicates liquidity and looser financial conditions as the driving force behind the rally.A significant amount of "smart money" has been net short, so this move might also be attributable, at least in part, to repositioning.We saw a situation quite similar to this one in the second quarter of 2020, when the most heavily shorted stocks ripped, which caught many investors off guard.Large jumps have happened around prior local bottoms, despite the fact that some people are skeptical of the signal provided by the equity put-call ratio.<h2>Will history repeat itself?</h2>There are numerous ways in which the current bear market decline is similar to the one that occurred in 2017-2018. Both the most recent market rebound and the first two quarters of 2019 have certain things in common, including the fact that both periods were preceded by significant price declines and a period of consolidation before strong rises upward. The trigger for each of these events is shifting assumptions about earlier economic headwinds.The financial markets have become more aware of the potential for an economic downturn, and it seems that everyone's base case scenario for this year now includes some kind of recession. However, this does not prove that the consensus is incorrect, given a number of leading indicators are still displaying recessionary warning signals.For example, the Conference Board US Leading Index has never dropped this much in a period of six months without a recession following it. The figure for the US ISM this week was 47.4, which reaffirmed the downward trend that we have been emphasizing for a few months now. However, markets tend to look into the future, and as a result, they have begun to look beyond the impending economic slowdown toward the policy reaction that is anticipated for it (i.e. return to accommodation). In the expectation that the Federal Reserve would "pivot" sooner than was originally anticipated, investors and traders seem to be "front running the front runner."<img src="https://cdn.builder.news/news/11edb0c957de96a98e59028438497b73.jpg" alt="indicator warning recession" title="indicator warning recession" width="600" height="230" class="lykafe0">Source: BloombergThe market is attempting to call the Fed on its bluff by engaging in a game of chicken with them. The bond market is sending a message that policy is excessively restrictive, similar to what we saw in late 2018 and early 2019 when the Fed paused its most recent hiking cycle in response to the market's signals. The yields on US Treasury bonds with a maturity of two years are currently lower than the Fed funds rate.If the cryptocurrency market were to follow the script it used in the second quarter of 2019, it would signal that this surge had more room to go.In bull markets, narratives are more important than in down markets, and this year, we've seen increased support for the "echo bubble" concept. This is a subject that we've already investigated in depth in Bull vs. Bear.If the market were to push higher, the scale of another rise might be pretty quick since there is not a lot of overhead supply for BTC in the area of $24-28K.As a result of the participation of a large number of crypto assets in the surge this year, bulls' claims that this market may still have space to go have received further backing.In a similar vein, the forecast for the short-term performance of US stocks has also been revised upward. As the index's 50-day simple moving average (SMA) is poised to cross above its 200-day counterpart, an occurrence known as a "Golden Cross," the S&amp;P 500 is off to its greatest start in over 30 years (matching 2019's gains YTD). This is an indication that the index is headed for its best start in over 30 years.Since the year 2000, the stock index has, on average, witnessed a gain of -7.5% after a period of 90 trading days that followed a significant price change. Every preceding incidence of such a period included a price change. If we expand the time frame, we find that the SPX, on average, continues to trend upward in the six to nine months that follow the event as well. According to Ryan Detrick, Chief Market Strategist at Carson Group, the fact that this occurred at a time when the SPX is more than ten percent below its ATH is even more optimistic for the market. After a period of 12 months, the SPX was profitable in 94% of preceding instances (15/16), with an average gain of around 16%.<img src="https://cdn.builder.news/news/11edb0c957debd7d8e59028438497b73.jpg" alt="sp 500 golden cross" title="sp 500 golden cross" width="600" height="253" class="lykafe1">Source: CarsonIt is important to note that a Golden Cross did not occur on the SPX during either the drawdowns that occurred between 2000 and 2002 or between 2007 and 2009; rather, a Golden Cross appeared only after the market had reached its low point and begun to rebound.&gt;&gt;&gt; Read more:<ul><li><a href="https://www.builder.news/crypto-insights/2022-crypto-market-report-p1-SWj5X" alt="crypto market report: A summary of 2022" title="crypto market report: A summary of 2022" target="_blank" rel="" class="">Year-end crypto market report: A summary of 2022 - Part 1</a></li><li><a href="https://www.builder.news/crypto-insights/yearend-crypto-market-report-a-summary-of-2022-part-2-6fd0Q" alt="Year-end Crypto Market Report: A Summary Of 2022: Part 2" title="Year-end Crypto Market Report: A Summary Of 2022: Part 2" target="_blank" rel="" class="">Year-end Crypto Market Report: A Summary Of 2022: Part 2</a></li><li><a href="https://www.builder.news/crypto-insights/2022-crypto-market-report-p3-soUdS" alt="Year-end crypto market report: A summary of 2022: Final part" title="Year-end crypto market report: A summary of 2022: Final part" target="_blank" rel="" class="">Year-end crypto market report: A summary of 2022: Final part</a></li></ul><h2>The cases for a rally</h2>As was to be anticipated, any indication of a prospective halt in rate rises would be applauded, even if it is still too soon for the Fed to really do so. The Fed's less hawkish tone (and clear suggestion of softening banking conditions) may have given markets the greenlight for now, but we think that if they do ultimately take a break, they will remain staunch in their position on keeping rates higher for longer.<h3>The Fed's statements</h3>The Federal Reserve continues to anticipate that "more work has to be done" in order to declare victory over inflation; nonetheless, the recent decreases in consumer price rise have redirected focus to the "red hot" labor market. The employment report released this week blasted beyond even the most optimistic projections made by economists, providing the Federal Reserve with another evidence that the economy is still on good footing.A more restrictive policy for a longer period of time would place a limit on how lax financial conditions may grow and, as a direct consequence of this, how high-risk assets can soar in value. However, tighter circumstances also enhance the likelihood of a recession, even if the timing of a downturn is delayed as a result of these tighter conditions. The statistics on employment tend to be a lagging signal as well, and there are a number of indicators that indicate to labor market downturn in the near future.<h3>Unemployment rate</h3><img src="https://cdn.builder.news/news/11edb0c957df157b8e59028438497b73.jpg" alt="unemployment rate" title="unemployment rate" width="600" height="228" class="lykafe2">Source: BloombergThe average length of time that the unemployment rate lags behind the Conference Board Leading Index is around 18 months. During a recession, unemployment will often increase, but it won't typically reach its peak until after the economy has shown indications of rebounding from the recession. Although many people are now shifting their opinions on the prospect of a soft landing, this does not always indicate that this is the scenario with the greatest chance. We are not in the pessimistic camp that believes a severe economic slump is on the horizon for us, but even a moderate economic slowdown has significant repercussions.<h3>Nonfarm and wage growth</h3>Even throughout the early phases of previous recessions, the number of people employed in nonfarm payroll jobs has continued to grow.It would seem that salary growth is stuck in place, while real wage growth (adjusted for inflation) is still in the negative territory.Last year, consumers used one of the quickest rates on record to withdraw money from their savings accounts. At the same time, credit card spending has increased since increasing expenses of living have cut into pay growth.The decline in corporate profits (which would likely be followed by a contraction in earnings if the economy entered recession) is a sign that future employment patterns would not be favorable.The Same End Game Will Be Played: The financial markets are likely to have a wild ride throughout this year. As turbulent price action and conflicting signals continue to confuse the waters in the financial markets, we anticipate that volatility will be a significant topic in 2023. Despite the fact that the picture for the near to medium term is less clear, our thesis for the long run has not changed at all.<h2>Conclusion</h2>In the near term, there is a greater potential for gains (the current rally could extend deeper into Q1).&nbsp; As the time horizon for a widely expected policy pivot continues to be pushed out, there is a good chance that market prices may reevaluate themselves, which might result in yet another period of consolidation (later in Q1/Q2).Leading economic indicators are pointing to a major economic slowdown by the middle of the year, which generally favors bonds over risk assets as volatility increases. The war between tightening monetary policy and improving liquidity conditions could keep market volatility at a high level. This is especially likely at a time when the debate in the United States over raising the debt ceiling is reaching its climax and concerns are growing regarding the impact of larger fiscal deficits.For high-growth industries, gaining access to capital will continue to be one of the most significant threats (like crypto).The urgency of the requirement for an increase in available liquidity will only increase as the year passes. Cracks will also become more visible in the labor market, which will offer the Fed cover for a move towards a more accommodating policy.In response to a worse GDP forecast and worries about developing fragilities in sovereign debt markets, the reversal in global liquidity that we noted at the end of last year will start to accelerate in the second half of 2023. This will function as support for risk assets.&nbsp;The impact of shifts in global liquidity on financial markets often occurs six to eighteen months later, which has the effect of establishing a more hopeful perspective for the years 2024 and 2025.<div class="pr-block-special">Disclaimer: This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.</div>

After more than a year of unrelenting falls in all cryptocurrency markets, both Bitcoin and the cryptocurrency market have entered a new bull market. Explore in-depth how it will happen through the article below!

The 2023 market rally is here