A 17% rise in the S&P 500 after another bear market low in a market steeped in stagflation panic? Was there. Such a rally rushing towards the index’s 200-day average alongside falling bond yields, the volatility index dropping below 20 and hope that the Federal Reserve would soon ease its tightening? It is done. All of this happened from mid-June to mid-August of this year and broadly repeated from mid-October to last week, with the S&P threatening to breach the 11-month downtrend line. like a bond rush. the buying sent Treasury yields rolling and the US dollar deflating. It doesn’t take AI-powered pattern recognition to observe these parallels and conclude that the latest rally is on borrowed time, yet another teasing bear market bounce likely to unfold against a valuation cap and issues. persistent recessions, as the summer version did . This reading of today’s pattern is both fair and, because it is so plausible, popular. Still, it’s worth exploring the key differences between now and the mid-August peak, as well as the disparities between the character of this cycle and many others of recent decades. On a purely technical, tape-reading basis, the S&P 500 this trip has actually now closed above its 200-day average, having only scratched that threshold in August. This is not an “On” switch for a new bull market, but it is a ticked box for now. More individual stocks have both hit new highs and are now above their own moving averages from the summer lead, a hint of better underlying demand but, again, which doesn’t quite carry the bullish case beyond a reasonable doubt. The equally weighted version of the S&P 500 is down just 8.5% this year and just 2% from its August peak, compared to 14.5% and 5% for the standard weighted S&P. of market capitalization, further proof that the “stock type” resists better than the biggest ones. Turning? The calendar is an obvious but perhaps relevant distinction. Only three bear markets have bottomed in the month of June since 1929, while seven – the most of any month – have ended in October. Although the sample size on this sort of thing is quite limited, the months following the midterm elections have historically been exceptionally favorable for equities. The investing public, usefully, has been considerably reduced. Bank of America is tracking the 12-month change in margin debt balances relative to overall market value, with the recent extreme decline and sharp upward reversal tentatively in line with some past market turning points. (This emerging trend still has a long way to go to prove itself, in a way that the indicator’s rebound in late 2000 decidedly did not.) Then there’s the fact that, over the past four In the months and a half since stocks peaked at a “low” in August, the market has absorbed a steady bombardment of Fed rate hikes and hawkish rhetoric designed to confuse investors. The federal funds rate was then below 2.5%, with Fed officials insisting it needed to become much more restrictive, as the rate is now near 4% and the Fed is signaling that it can slow down to their destination, maybe close to 5%. The consensus 12-month forward earnings forecast for S&P 500 companies has fallen 4-5% since the market peak in mid-August, leaving the index only slightly cheaper than four years ago. months, but actually showing that the downside risk to earnings came as no surprise to the market. While difficult to quantify or prove specific relevance, since the summer we have seen an accelerated collapse of the crypto-trading complex – completing a $2 trillion peak-to-trough loss in notional crypto wealth. – without observable fallout on equities, credit markets or the banking system in the broad sense. With all of this, a defensible case can be made that the market is displaying tenacious resilience, feeding on a deep reservoir of investor skepticism and cautious portfolio positioning. An arguable case, but not a lock. “Technical Torture Chamber” John Kolovos, Chief Technical Market Strategist at Macro Risk Advisors, is open to the possibility that the market is trying to form a reliable bottom, but doesn’t see it as an easy ride from here: “The spike in inflation will help build a floor, but growth concerns will limit equity market upside. The net result of this momentum will make trends harder to exploit and keep us in the technical torture chamber until in 2023.” Macroeconomic anxiety is both extreme and based on ample evidence. Compression in longer-term Treasury yields, even after Friday’s seemingly strong jobs report, removes a direct source of pressure equities, while leaving the yield curve even more inverted, with short-term rates at a big premium to 10-years.As Bespoke Investment Group said on Friday evening, “Treasury buyers came out strong even with stronger than expected economic data, suggesting the market knows a weaker economy and a looser Fed are still on the way.” Gloomy CEO and consumer confidence numbers, collapsing real estate activity, the ISM manufacturing index slipping below the 50 line are all seen as pre-recession indicators and, historically, stocks are not have never bottomed out before a recession began. The inverted yield curve is also not to be discounted, but the lag between the inversion and the onset of the recession has sometimes been up to two years. And the market pattern this time has not been typical. The equity market has tended to do well in a Fed tightening cycle and hit or near highs on the first shift to an inverted Treasury curve. This time, stocks started falling two months before the Fed’s first rate hike. And, as Jim Paulsen of the Leuthold Group points out, “By the time the yield curve inverted in October, the S&P 500 had already fallen about 25% from its peak, essentially ‘pricing’ a more potential reversal than it had in any previous episode since at least 1965.” He analyzed the numbers to show that when stocks were weak in the past before a 3-month/10-year Treasury reversal, the market tended to hold up better even when a recession ensued The most anticipated recession of all time is not entirely closed to the idea of an economic soft landing. Nominal GDP growth (real growth plus inflation) now stands at nearly 6-7% annualized, above the best levels in years 2010, indicating that the n The absolute level of economic activity is high enough to cushion the impact of a downturn on business earnings, at least for a while. A survey of Philadelphia Fed economists recently showed that a record percentage of forecasters expect the recession to hit within a year, making it the most anticipated contraction of all time. Wall Street strategists, meanwhile, collectively forecast a modest decline in the S&P 500 for 2023, the first time since at least 1999, when the consensus failed to target annual gains. It’s understandable why, given a strident Fed and past bear market trends; in 2001 and 2008 there were good rallies in the fourth quarter with a strong November (as we had this year) and in each case the indices rebounded strongly in the new year, at least for a time. Yet in this situation, low expectations are better than high hopes.
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