The difference between this return and the last failed bear market bounce
17% S&P 500 Ripples From New Low In A Bear Market In A Market Steeped In Stagflation Panic? I was there. A rush like that to the 200-day average for the index combined with a slump in bond yields, a collapse in the volatility index below 20, and you hope the Fed soon eases its tightening? I did that. All of this happened from mid-June to mid-August this year, and generally repeated from mid-October until last week, with the S&P threatening to break above its 11-month downtrend line as a push of bond buying sent Treasury yields rolling and the US dollar contracting. It doesn’t take AI-powered pattern recognition to notice these similarities and conclude that the recent rally is in borrowed time, yet another bear market bounce is likely to fade against the valuation cap and lingering recession fears, as the summer edition did. . This reading of today’s setups is fair, and because it’s so sensible, it’s popular. However, it is worth exploring the major differences between now and the mid-August peak, as well as the discrepancies between the character of this cycle and many other features from recent decades. On a purely technical basis of a tape reading, the S&P 500 has now closed the journey above the 200-day average, whereas it touched that limit in August. This is not a “on” switch for a new bull market, but it is a box that has been turned off for the time being. More individual stocks have made new highs and are standing above their various moving averages now than they did during the summer advance, which is evidence of better underlying demand, but, again, doesn’t hold the bullish case beyond reasonable doubt. The weighted version of the S&P 500 is down just 8.5% this year and just 2% from its peak in August, compared to 14.5% and 5% for the S&P benchmark, further evidence that “ordinary stocks” are holding up better than stocks. the biggest. turning point? Calendar is an obvious distinction but potentially relevant. Only three bear markets have bottomed in the month of June since 1929, while seven — the most of any month — ended in October. While the sample size in this sort of thing is very limited, the months after the midterm elections have historically been extraordinarily stock-friendly. It helps that the investing public has shrunk sharply. Bank of America tracks the 12-month change in marginal debt balances relative to total market capitalization, with the recent sharp decline and sharp reversal upward tentatively fitting the pattern of some previous turning points in the market. (This emerging trend still needs a lot of work to prove itself, though, in a way that the late 2000’s bounce certainly didn’t.) Then there’s the fact that in the four-and-a-half months since stocks peaked at a “lower high” in August, the market has absorbed a steady bombardment from Fed rate hikes and hawkish rhetoric designed to piss off investors. The federal funds rate was less than 2.5% then with Fed officials insisting it should be more restrictive, while the rate is near 4% now and the Fed is suggesting it could slow to a destination of perhaps near 5 %. The 12-month forward earnings forecast for the S&P500 companies has fallen 4-5% since the market peak in mid-August, making the index a little less expensive than it was four months ago but actually showing that downside risks to earnings have come as no surprise to the market. While it is difficult to quantify or establish a specific significance, since the summer we have witnessed a rapid collapse of the cryptocurrency trading pool – complete with a $2 trillion peak-to-trough loss in virtual crypto wealth – with no discernible repercussions for stocks, credit markets or the broader banking system. . With all this, one can build a defensible argument that the market is showing stubborn resilience, feeding a deep stock of investor skepticism and cautious portfolio positioning. Defensible issue, but not a lock. “Technical torture chamber” John Kolovos, chief technical market strategist at Macro Risk Advisors, is open to the chance that the market may try to form a reliable bottom but doesn’t see it as an easy way from here: “Peak inflation would help build the bottom line, but growth concerns The net result of this dynamic will make it more difficult to exploit trends and keep us in a technical torture chamber until 2023.” Macroeconomic anxiety is extreme and evidence-based. The squeeze in long-term Treasury yields even after Friday’s seemingly solid employment report removed a direct source of stress from stocks, yet left the yield curve further inverted, with short-term rates at a significant premium over 10-years. As Bespoke Investment Group said late Friday, “Treasury buyers came out in full force even with stronger-than-expected economic data, suggesting that the market knows a weaker economy and a looser Fed are still in the way.” Gloomy CEO and consumer confidence readings, a collapse in housing activity, and the ISM Manufacturing index sliding below the 50 line are all pre-recession qualifiers and stocks have not historically bottomed before a recession begins. An inverted yield curve should also not be ruled out, but the lead time from inversion to the onset of a recession was sometimes as much as two years. And the market setup this time was not typical. The stock market tends to run well into the Fed tightening cycle and be at or near the highs on the first slide into an inverted Treasury curve. This time, stocks started to fall two months before the first Fed rate hike. As Leuthold Group’s Jim Poulsen points out, “By the time the yield curve inverted in October, the S&P 500 had already fallen about 25% from its high, essentially ‘pricing in’ a potential reversal by more than it has ever been.” earlier episode since at least 1965″. He analyzed the numbers to show that when stocks were in the past weak before the 3-month/10-year Treasury coup, the market tended to hold up better even when a recession followed. Most Expected Recession Ever Of course, the job count as well as the personal spending data reported last week show that the door hasn’t been completely closed on the idea of a softer economic downturn. Nominal GDP growth – real growth plus inflation – is now running close to 6-7% annually, above the best levels of 2010, a sign that the absolute level of economic activity is high enough to offset the impact of a slowdown on corporate revenues at least for the time being. A recent economic survey by the Federal Reserve Bank of Philadelphia showed that a record percentage of forecasters expect a recession within a year, making this downturn the most expected of all. Meanwhile, Wall Street strategists collectively expect the S&P 500 to decline slightly for 2023, the first time since at least 1999 when consensus failed to target annual gains. It’s understandable why, given the sharp Fed and previous bear market patterns; In both 2001 and 2008, there were good Q4 bounces that marked November (as we had this year) and in each case the indicators were rolling hard into the new year, at least for a while. However, in this case, low expectations are better than high hopes.
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