The 1982 tips have a strategist stating that the bear market is over: Morning Brief

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Tuesday 2 August 2022

Today’s newsletter is from Myles Udland, senior editor of Yahoo Finance Markets. Follow him on Twitter @MylesUdland and go LinkedIn.

When the closing bell rang last Friday, the S&P 500 posted its best monthly gain since November 2020.

The apparent enthusiasm of investors in July could be perplexing given the economic and earnings environment facing the markets.

But for Tom Lee, co-founder and head of research at Fundstrat, the recent market rally makes perfect sense. Also, Lee argues, history suggests that we may be at the start of a stronger push towards the end of 2022.

“The biggest takeaway for me on this week’s events?” Lee asked in a note published on Friday: “Compelling and probably decision-making evidence that the ‘bottom is in’: the 2022 bear market is over.”

Last week, the Fed raised interest rates by another 0.75%. GDP data showing a second consecutive quarter of negative GDP growth. Recent real estate data has shown a notable slowdown in arguably the most important sector of the economy. And looking overseas, news has come that Russia has further cut off gas flow to Germany as Europe prepares for a potentially freezing winter in the midst of the Russian war in Ukraine.

Yet the markets have increased.

“When the bad news doesn’t bring the markets down,” Lee added, “it’s time for investors to evaluate.”

This week began with FactSet data released Monday showing analysts making larger-than-normal cuts to third-quarter estimates. In other words, analysts are more bearish than normal on corporate profits. And this aggregate downgrade to earnings expectations comes amid high-profile flops from the likes of Meta Platforms (META) and Intel (INTC) over the past week.

Fundstrat’s optimism, however, goes beyond a view that the worst of the news stream is over for investors. In recent weeks, Fundstrat has argued that the market setup is similar to the one presented to investors in August 1982, a time that preceded a fierce equity market rally amid a Fed pivot.

In the summer of ’82, the US economy was in the throes of recession and then Fed Chairman Paul Volcker had not yet signaled whether the Fed would ease its campaign to slow inflation.

Federal Reserve Board Chairman Paul Volcker stands with his hands on his hips and smokes a cigar at a meeting in Washington, 1982.
Federal Reserve Board Chairman Paul Volcker stands with his hands on his hips and smokes a cigar at a meeting in Washington, 1982. (Getty Images)

In October of that year, Volcker signaled that the Fed could moderate efforts to slow inflation. “There are forces that would push the economy towards recovery,” Volcker said in a speech in the New York Times. “I think the political goal should be to support that recovery.”

For investors, “support that recovery” kicked off a nearly 20-year bull market in equities. Two months before the pivot, markets sniffed at the Fed’s plans and in just four months they erased all losses from a 22-month bear market that saw the S&P 500 drop 27%.

And this 40-year rally is why, according to Lee, the S&P 500 could return above 4,800 and reach new highs by the end of this year. Last week, Lee noted that the bond market canceled more than 0.5% of the Fed’s projected interest rate hikes through next spring.

“The bond market made a serious ‘dovish pivot’ in Fed fund pricing in 2023,” said Lee. “Is it any wonder that equity markets found ground in July?”

Source: Fundstrat

Source: Fundstrat

Additionally, Lee sees the market price in a growth scare rather than a full-blown recession.

As widely discussed during the spring, the S&P 500 falls by an average of 32% during a typical US recession. From peak to low, the decline in the S&P 500 during the current decline from record highs reached 23%. And if the recession is averted, the more than 30% drop that many investors are bracing for may never materialize.

Last week’s GDP data sparked a lively conversation about whether the US economy was already in – or would fall – into a recession. At least two negative quarters of GDP growth meet the criteria for a “technical” recession. Although, as we highlighted on Friday, Bank of America economists explained why a formal call to recession isn’t likely to come anytime soon.

Manufacturing data released Monday also added evidence for a slowdown in growth, but not necessarily a full-blown recession.

U.S. manufacturing growth fell to a two-year low in July, according to the Institute for Supply Management’s latest Purchasing Managers Index (PMI). The PMI showed the biggest drop in a month in the pace of price increases, but it still came in at 52.8 and any reading above 50 shows an expansion in the sector.

Similarly, S&P Global survey data showed slowing manufacturing growth amid a noticeable decline in inflationary pressures, but this is a trade-off the Federal Reserve made clear last week that it is willing to make.

“Supply chain problems remain a major concern, but have eased, reducing the price pressure somewhat for a variety of inputs,” wrote Chris Williamson, chief business economist at S&P Global Market Intelligence. “This has led to the smallest increase in the price of goods that have left the factory gate seen for nearly a year and a half, the rate of inflation has cooled sharply to add signs that inflation has peaked.”

What to watch today

Economic calendar

  • 10:00 ET: JOLTS job offersJune (11,000 million expected, 11,254 million in the previous month)

  • Total vehicle sales departments (13.4 million expected, 13 million in the previous month)

I earn


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