A 17% rise in the S&P 500 from a new bear market low in a market steeped in stagflation panics? Was there. Such a rally that rushes to the index’s 200-day moving average alongside falling bond yields, the volatility index falls below 20 and hopes that the Federal Reserve will ease its tightening soon? did that All of this happened from mid-June to mid-August this year and broadly repeated from mid-October to last week, with the S&P threatening to break above the 11-month downtrend line as bond buying led to rising Treasury yields and to deflation of the US dollar. It doesn’t take AI-powered pattern recognition to observe these parallels and conclude that the recent rally is on borrowed time, another teasing bear market rally likely to unwind against a valuation cap and lingering recession worries, just like the summer version . This reading of today’s setup is both fair and popular because it is so plausible. Still, it’s worth examining the key differences between now and the mid-August peak, as well as the differences between the character of this cycle and many others from the last several decades. Technically, the S&P 500 actually closed above its 200-day moving average on this trip, while only touching that level in August. That’s not an “on” switch for a new bull market, but it’s a tick for now. More individual stocks have both made new highs and are now above their own various moving averages compared to the summer rally, an indication of better underlying demand but again one that doesn’t carry the bull case beyond a reasonable doubt. The equally-weighted version of the S&P 500 is down just 8.5% this year and just 2% off its peak in August, compared to 14.5% and 5% for the market-cap-weighted standard S&P, further showing that the “typical stock” holds up better than the largest. turning point? The calendar is an obvious but potentially relevant distinction. Since 1929, only three bear markets have bottomed in June, while seven — the most of any month — ended in October. While the sample size is fairly limited for this type of thing, the months following the midterm elections have historically been unusually kind for stocks. The investing public has, helpfully, greatly withdrawn. Bank of America tracks the 12-month change in margin debt balances relative to overall market value, with the recent extreme decline and sharp reversal to the upside tentatively fitting the pattern of some previous market reversals. (This emerging trend has a lot yet to prove itself, however, in a way that the indicator’s rally in late 2000 definitely didn’t.) Then there’s the fact that in the four and a half months since stocks in August, a ” lower high,” the market has weathered a steady barrage of Fed rate hikes and hawkish rhetoric designed to unsettle investors. The federal funds rate was below 2.5% then, with Fed officials insisting it needs to get much more hawkish, while the rate is now nearly 4% and the Fed is signaling it can slow down to meet its target , maybe close to 5%. The 12-month consensus earnings forecast for S&P 500 companies has fallen 4-5% since the market peaked in mid-August, making the index only marginally cheaper than four months ago, but actually shows that downside risk to earnings has come as no surprise for the market. While it’s difficult to quantify or prove any specific relevance, we’ve seen an accelerated collapse in the crypto trading complex since the summer – with a $2 trillion loss from peak to trough in the notional crypto fortune – with no observable spillover to the stock and credit markets or the broader banking system. With all of this, one can make a valid argument that the market is showing stubborn resilience, feeding on a deep reservoir of investor skepticism and cautious portfolio positioning. A defensible 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 attempting to form a reliable bottom, but doesn’t see it as an easy path from here: “Peak inflation is turning to Build-up will provide a floor, but growth concerns will cap upside for equity markets. The net result of this momentum will make it harder to take advantage of trends and keep us locked in the technical torture chamber well into 2023.” Macroeconomic concerns are both extreme and backed by ample evidence Friday’s payrolls report removes a direct source of pressure from equities but left the yield curve even more inverted, with short-term rates at a whopping premium to the 10-year As Bespoke Investment Group put it late Friday: “Treasury Buyers came out in full force despite stronger-than-expected economic data, suggesting the market knows a weaker economy and a looser Fed are still on the way ISM manufacturing index, the below the 50 line are all considered pre-recession indicators, and historically stocks have never bottomed before a recession started. The yield curve pointing upwards cannot be denied either, but the lead time from the inversion to the onset of the recession was up to two years in some cases. And the market setup this time was not typical. The stock market has tended to be well into a Fed tightening cycle and be at or near highs at the first dip into an inverted Treasury curve. This time, stocks started falling two months before the Fed’s first rate hike. And as Leuthold Group’s Jim Paulsen 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 in a potential inversion by more than any previous episode since at least 1965.” He summarized the numbers to show that where stocks have historically been weak prior to a 3-month/10-year Treasury reversal, the market has tended to hold up better even when a recession ensues. The Most Anticipated Recession Ever Of course, the jobs and personal spending numbers reported over the past week show that the door isn’t entirely closed to the notion of a softer economic landing Nominal GDP growth – real growth plus inflation – is now close to 6-7% on an annualized basis, up from the best of the 2010s, an indication that absolute levels of economic activity is high enough to cushion the impact of a slowdown on corporate earnings for at least a period of time. A recent poll by economists at the Philadelphia Fed found that a record percentage of forecasters expect a recession to materialize within a year, making this the most-anticipated contraction of all time. Wall Street strategists, meanwhile, are collectively forecasting a modest decline in the S&P 500 in 2023, the first time since at least 1999, when the consensus was targeting no annual gains. Given a strident Fed and the patterns of previous bear markets, it’s understandable why; Both 2001 and 2008 had good fourth quarter rallies with a strong November (as we had this year) and in any case the indices turned around strongly in the new year, at least for a while. Nevertheless, in this situation, low expectations are better than high hopes.
