S&P 500 up 17% from new bear market low in a market engulfed in inflationary panic? Were there. Such a rally spikes to the index’s 200-day average along with a drop in bond yields, Volatility Index drops below 20 and hopes the Federal Reserve eases the tightening soon? All of this happened from mid-June to mid-August this year and has generally repeated from mid-October to last week, with the S&P at risk of breaking above its 11-month downtrend line due to The buying craze caused Treasury yields to reverse and the dollar to deflate. No AI-powered pattern recognition is needed to observe these similarities and conclude that the latest bull run is taking place during borrowed time, but another bear market rally is likely. address the valuation ceiling and lingering recession concerns, just as the summer edition did. Reading about setup these days is both fair and common because it makes so much sense. However, it is worthwhile to explore the key differences between the current and the mid-August peak, as well as the differences that characterize this cycle and many others in recent decades. On a purely technical, tape-read basis, this S&P 500 trip has in fact now closed above its 200-day average, while it only hit that threshold in August. This is no business. “On” switch for a new bull market, but it’s currently a checked box. Many individual stocks have hit new highs and are now above their own different moving averages compared to the summer rally, a sign of better underlying demand, but again , a sign that doesn’t quite give a bullish case beyond all reasonable doubt. The equivalent weighted version of the S&P 500 is down just 8.5% this year and only 2% from its August peak, compared with 14.5% and 5% for the capital-weighted S&P. standard market capitalization, adding evidence that the “typical stock” is holding up better than the largest stocks. Turning point? Calendar is an obvious but possibly related distinction. Only three bear markets bottomed in June since 1929, while seven – the most in any month – ended in October. Although the sample size for this type of event is quite limited, but the months following the midterm elections are unusually stock-friendly. The investing public has, helpfully, been severely in decline. Bank of America tracks the 12-month change in margin debt balances relative to overall market value, with the recent sharp decline and sharper reversal higher likely fitting the model of Bank of America. some previous market turning points. (However, this emerging trend still needs a lot of work to prove itself, in a way that the index’s late-2000 rally clearly didn’t.) Then there’s the fact that, In the four-and-a-half months since stocks peaked at “lower highs” in August, the market has been under constant attack from Fed rate hikes and designed hawkish rhetoric. designed to upset investors. Back then, the Federal funds rate was below 2.5% with Fed officials insisting it should be much more restrictive, while the current rate is near 4% and the Fed signaling it could slow down to arrive. the target is probably closer to 5%. Consensus earnings forecasts for the next 12 months for S&P 500 companies have fallen 4-5% since the market peak in mid-August, making the index only slightly cheaper than it was four months ago but The fact that the risk of falling earnings has come does not surprise the market. While it is difficult to quantify or prove specific relevance, since the summer we have seen an increasing downturn in the crypto trading complex – completing a loss of 2 trillion Dollar peak to trough for nominal crypto assets – no observable spillover to the stock market, credit or broader banking system. With all this in mind, one can build a defensible case that the market is exhibiting enduring resilience, fostering deep investor skepticism and positioning prudent investment. A case of defense, but not a lock. ‘Technical torture chamber’ John Kolovos, director of technical market strategy at Macro Risk Advisors, opens up the possibility that the market is trying to form a credible bottom but doesn’t consider it an easy ride: Peak inflation will help build a floor, but growth concerns will limit equity market momentum.The end result of this momentum will make trends harder to tap and hold us in the technical torture chamber until 2023.” The macroeconomic anxiety is both extreme and well-founded, with plenty of evidence. The drop in long-term Treasury yields even after Friday’s seemingly positive jobs report removed the direct source of pressure from equities, but left the yield curve even inverted. moreover, with short-term interest rates at a higher level than 10-year tenors. As Bespoke Investment Group put it late on Friday, “Treasury buyers turned up in full force even on stronger-than-expected economic data, which shows the market knows that a Weaker economy and more Fed easing are still happening.” CEO dismal and consumer confidence, housing activity collapse, ISM manufacturing index slips below 50, all seen as pre-recession indicators and stocks never in history bottomed out before the recession started. An inverted yield curve isn’t ruled out either, but the lead time from inversion to the start of a recession is sometimes as long as two years. And the market setup this time is not typical. The stock market tends to move quickly into the Fed tightening cycle and peak or near the top when it first slips into 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 pointed out, “By the time the yield curve inverted in October, the S&P 500 was down about 25% from its highs, essentially ‘valuation’ ‘ is more reversible than it has been in any previous episode since at least 1965.” He analyzed the numbers to show that when stocks have in the past weakened ahead of 3-month/10-year Treasury notes, the market tends to hold out better even into the next downturn. . Of course, the employment numbers as well as personal spending data reported last week suggest the door is not completely closed to the notion of a softer economic landing. Nominal GDP growth – real growth plus inflation – is currently near 6-7% annualized, well above the best of the 2010s, a hint that the absolute level of economic activity high enough to cushion the impact of the recession on corporate revenue at least in the near term. a time. A recent survey of Philadelphia Fed economists showed that a record percentage of forecasters expect a recession to happen within a year, making it the most anticipated recession since. before to now. Meanwhile, Wall Street strategists are collectively predicting a modest drop in the S&P 500 in 2023, the first since at least 1999 when consensus fell short of its annual gain target. . It’s understandable why, given a strict Fed and past bear market patterns; in both 2001 and 2008 there were good rallies in the fourth quarter with a strong November (as we have had this year) and in each case the indices rallied in the new year, at least especially for a while. However, in this situation, low expectations are still better than high expectations.