The combination of elevated inflation and a slowing economy poses a Scylla-and-Charybdis dilemma for investors.

In Homer’s epic tale, Odysseus and his shipmates were compelled to navigate the narrow waters between two mortal dangers: the sea monster Scylla and the devouring whirlpool Charybdis. (Cue Die Hard villain Hans Gruber: “Benefits of a classical education.”)

As I explain below, the twin monsters of high prices and weakening growth are squeezing corporate operating results. But I also highlight important bullish technical trends.

Fourth-quarter 2022 earnings season began in earnest this week and as usual, the Big Banks kicked off the festivities. Before the opening bell Friday, bellwether financial services giants reported results that bode poorly for the economy.

JPMorgan Chase (NYSE: JPM), the biggest U.S. bank by assets, beat estimates for Q4 revenue and earnings per share (EPS). Bank of America (NYSE: BAC) also beat on both the top and bottom lines. Wells Fargo (NYSE: WFC) beat on EPS but missed on revenue. Citigroup’s (NYSE: C) profit fell by 21%.

However, management at these banks said they were setting aside more money to cover credit losses, because they expect the deadly combination of inflation and recession.

As fresh reserves in case of loan defaults, JPMorgan Chase set aside $1.4 billion; Bank of America, $403 million; Citigroup, $640 million; and Wells Fargo $397 million.

To be sure, higher interest rates are generating greater interest income for banks, but much of that gain is getting offset by bigger provisions for expected loan losses as the economy sputters and inflation-wary consumers cut back on borrowing and spending. Inflation is cooling, but it still remains unacceptably high.

Provisions for loan losses have no impact on revenue growth, but do have an impact on bottom-line growth, because they are reported as an expense on a company’s income statement.

Investment banking revenue also is taking a hit across the board among major banks, as the sputtering global economy undercuts dealmaking.

After the opening bell Friday, the main U.S. stock market indices initially fell, with the financial services sector leading the way down. However, later in the trading session, the major indices, as well as major bank stocks, reversed course and pared losses. The rebound was driven by encouraging consumer sentiment and inflation expectations data.

The University of Michigan’s influential consumer sentiment index rose to 64.6 in the January survey, according to data released Friday. It’s the highest reading since January 2022 and up 8.2% from the 59.7 reading in December. The January 2023 reading beat consensus expectations of 60.5.

The survey also showed consumers’ inflation expectations for 2023 and five years out were 4% and 3%, respectively. The year-ahead inflation expectations reading hovers at its lowest since April 2021. Expectations play a major role in inflation, because they can serve as a self-fulfilling prophecy.

On Friday, the main U.S. stock market indices closed higher, as follows:

• DJIA: +0.33%
• S&P 500: +0.40%
• NASDAQ: +0.71
• Russell 2000: +0.58%

The main U.S. equity benchmarks have posted back-to-back weekly gains. The battered, tech-heavy NASDAQ is up 5.5% so far this year, as investors become more willing to shoulder risk.

Earnings hit a speed bump…

For corporate profits overall, we’re looking at a disappointing quarter. The projected year-over-year EPS decline for the S&P 500 for Q4 2022 is -4.1%, according to research firm FactSet.

If -4.1% turns out to be the actual decline for the quarter, it will mark the first time the index has reported a year-over-year earnings decline since Q3 2020 (-5.7%).

In the corporate C-suite, pessimism is the prevalent stance. For the quarter, 65 S&P 500 companies have issued negative EPS guidance and 35 have issued positive EPS guidance (see chart).

Analysts are getting gloomy as well. Wall Street analysts have lowered EPS estimates for the quarter by a larger margin than average.

Two bullish technical indicators…

However, as we get deeper into the first month of the year, bullish technical trends are emerging.

Consider the 200-day moving average, a popular technical indicator which investors use to analyze price trends.

The 200-day moving average represents the average closing price over the past 200 days. The moving average gives us a clue as to whether the trend is up or down; it also identifies potential support or resistance areas.

The S&P 500 is closing in on its 200-day moving average; the New York Stock Exchange Advance Decline line (NYAD) has already topped that threshold.

It’s a bullish trend when NYAD rises, because more stocks are advancing than declining. Conversely, a falling NYAD line is bearish.

Regardless, if the banks are right and we face recessionary conditions in early 2023, you need to hedge your portfolio accordingly. The consumer staples and health care sectors are proven “essential services” plays that tend to defy downturns.

And so is marijuana. That’s right…marijuana. Despite the slowing economy, demand for pot is soaring. Polls show that an increasing number of consumers view marijuana as a must-have staple, like milk or eggs.

And yet, many intrinsically sound cannabis investments have gotten caught in the downdraft of the overall bear market. Appealing values abound among pot stocks, but you need to know where to look.

That’s why I’ve launched a new premium trading service called Marijuana Profit Alert. To learn more about Marijuana Profit Alert and my specific money-making trades, click this URL

John Persinos is the editorial director of Investing Daily.

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