Investing sentiment going into 2023 has been terrible. So what's happened so far in 2023? The stock market has rallied. The S & P 500 is up 3.4%, but there's plenty of stuff that is flying. The worst performers last year (semis, ARK Innovation, Retail, Real Estate) are all outperforming. Sector leaders: 2023 ARK Innovation (ARKK) up 11.3% Semiconductors (SMH) up 9.2% Retail (XRT) up 8.2% Real Estate (REITs) up 6.4% Global stocks are doing better than the U.S. and European stocks are at the highest levels since April of last year and just 8% shy of new highs. China is one of the best performing markets in the world. Bespoke Investment Group noted that in the first seven trading days of 2023, 175 stocks in the Russell 1000 are up 10% or more. That's more than were up 10% or more in all of 2022 on a total return basis. Foreign markets in 2023 China (MCHI) up 12.4% Europe (STOXX 600) up 5.3% The pain trade: it never goes away It's called the pain trade. It's the trade or trend that will cause the greatest distress to the greatest number of investors. Going into 2023, the pain trade was that the market would rally. Sure enough, it has. Stocks are rallying on a bet that inflation (particularly wage inflation) is moderating and that job growth will slow down but not collapse. That is the soft landing. Thursday's CPI at 8:30 a.m. ET is expected to confirm the inflation is slowing story. After peaking in June of 2022 at 7.1% year over year, December CPI is expected to come in at 6.6%, according to the Dow Jones consensus estimate. Month over month inflation is expected to be flat — no growth in inflation at all. That's good news for bulls. Here's the bad news: So much price movement has occurred in so short a time that it is possible an in-line report may not move the market at all. "An in-line report doesn't cut it, in-line has already been sold," Chris Murphy, co-head of derivative strategy at Susquehanna, told me. Jim Besaw, chief investment officer at investment advisor GenTrust, agrees. "In my mind it [CPI] would have to be below consensus for the market to rally," he told me. OK, inflation is declining, but the Fed still isn't changing course Longer-term, bears are insisting none of the immediate data is going to change the Federal Reserve's projections. Numerous FOMC officials have insisted the Fed will keep interest rates in the 5% range or above for all of 2023 and, some say, into 2024. "It would take a real regime shift in the environment to meaningfully alter the FOMC's course," Mike O'Rourke from Jones Trading said in a note to clients. "It would take months or even quarters of [inflation moving down] trend to move the policy needle at the FOMC." Besaw agrees. His research indicates it takes 6 to 12 months for the increase in the Fed funds to have an impact on the components of inflation. "If you benchmark the Fed funds increase starting in April of 2022, we are just starting to see a period where we should see an impact," he told me. He is particularly watching rental costs: "For inflation to come down, rents have to come down, and if they don't the Fed is going to be concerned." "If you believe in history, it's going to take a while to get back to two or two and a half percent [the Fed's target for inflation], but the markets have already begun pricing that in...but this idea that inflation is just automatically going to keep going down because it's gone down in the last couple of months, I think is kind of a dangerous one to extrapolate." On the other hand, if rents do come down steadily, the soft landing becomes more likely, but "historically it hasn't happened that easily."