There has been nothing routine in the current business and market cycle. Since Covid-19 first emerged, we’ve seen the fastest 30% stock market decline ever, the shortest recession, the most aggressive fiscal and monetary response, the fastest doubling of the S&P 500 from a low bear market in history, the highest inflation in decades, the most vigorous Federal Reserve tightening maneuver in a generation and the worst first half of the year for equities in half a century. Given all of these superlatives and rarities in the recent past, historical models may not offer very useful wisdom as to how things could go from here, as a resilient stock market and still healthy employment picture compete with a steadfast Fed and Treasury yield. deeply reversed curve for the attention of investors. However, the markets are animated by the immutable human nature that drives the psychology of the crowd interacting with repeated economic cycles. So historical rhythms are largely what market handicappers have to work with. And bears and bulls alike have their favorite precedents. The 2000-2003 bear The most skeptical of this rally are keeping the early millennium bearish phase at the top of their analysis. This was the relaxation of an exuberant and overvalued stock market focused on technology, coinciding with a relatively superficial economic recession, but which triggered a bad showdown within corporate America. The Fed steadily raised interest rates in 2000 to contain inflation in a fully occupied economy, a similar but less dramatic version of the current deal. On a tactical level, technical analysts are noticing the pattern of very strong bear market rallies that exploded along the way during the S&P 500’s long slide to a near 50% decline in early 2003, which eventually offered. false hopes that they represented a real fund. A strong rebound in early 2001, after the S&P 500 had fallen more than 25% from its March 2000 peak, gained over 20% and recovered almost exactly half of the index’s total losses up to that point. period, before returning to new lows by that September. Technicians have generally been on the right side of the market in recent months, their approach to sticking to the prevailing trend above all has kept them cautious and ready to advise selling in rescue rallies. Strategas’ Chris Verrone examined the strong but ultimately doomed 2001 rally in detail to say it lacked the kind of momentum boost and sentiment shift that would turn the uptrend, and sees the current rally in a similar light. BTIG’s Jonathan Krinsky pointed out that any rally that regains more than half of the total decline at the close tends to mean that a bear market is likely over. In the current situation, this would mean that the S&P rises another 2-3% above 4,230, a test close to bear determination. In detail, today’s conditions do not perfectly match those of 2000-2003, of course. Stocks have never gotten this expensive this time around and at the peak they were sitting on less exciting long-term gains. Right now, seven months into this market downsizing, the final total annual return of the S&P 500 over the past five, 10, and 20 years is 12.6%, 13.6%, and 10.5%. These are quite healthy gains and investors should recognize that the market has been positive with them even after this difficult period. After a similar period of time after peaking in 2000, the S&P had delivered 21%, 19%, and 17% annually over the previous five, 10, and 20 years, making the forces of return to the average much stronger. Aside from the early 21st century model, skeptics right now are noting that the Fed’s rapid tightening cycles tend to keep stocks under pressure and the S&P 500 valuations have climbed above 17.5 times forward earnings. from a brief stay below 16. S & P’s forward P / E weight parity remains below 16 (huge cap stocks are inflating the index multiple), it’s hard to argue that the market is exactly cheap. The experience of the 2010s A more optimistic opinion sees the current economy as nothing more than a deceleration and a fright for growth, but without the excesses accumulated in leverage and the recklessness of companies or consumers that would lead to a bad recession. In the year 2010, the economy was considered fragile just one year after it came out of a traumatic shock. Stocks were spewing a slice of their quick gains from the bottom of the market and investors generally believed the Fed was cornered and would have to accept serious damage to the economy and corporate profitability to escape its predicament (deflation then, inflation). Now). It was also a mid-term election year with an unpopular first-term Democratic president facing an adverse swing in the composition of Congress. That year, with investors growing concern over systemic shocks in European economies, the S&P 500 plunged 17% from a January high to a June low before recovering, first in a sideways range to the fall and then with a strong upward push. This precedent’s appeal to the bulls right now should be clear enough given the similar pace of the 2022 tape so far. Ned Davis Research maintains a “composite of the cycle” chart for each year, combining the seasonal pattern of the annual market, the four-year election cycle, and the 10-year “ten-year” trend. (Aren’t everyone aware that the years ending in “2” have been characterized by many significant market reversals?) So far this year’s path generally follows the cadence of this composite cycle, in direction and timing if not in size. For what it’s worth, this picture fits in with June market lows for 2022. For separate reasons, Ned Davis’ US chief strategist Ed Clissold has shifted 5% of his model equity portfolio from liquidity, driving equities to a target market weight, largely based on some amplitude signals triggered in the ramp of the mid-June low, noting on Tuesday, “The risk that the recent advance is simply a bear market rally has not been eliminated. But. .. the technical improvement up to this point is more like a new cyclical bull market than a bear market rally. ” Such inflection points are clear only in retrospect, of course. But the June low featured some rare extremes showing a faded market of a kind that typically meant a very high probability that the S&P would be higher in 12 months. And companies that missed earnings forecasts this quarter saw their shares hold up better than in most quarters recorded, a decent sign that the market had priced a fair amount of bad news. The index is now, of course, already 13% higher than the June oversold low, so that doesn’t mean the market is headed upward from here, in any way. However, the tape’s ability to gain traction on Friday after a quick sell-off reflected on the very strong monthly employment report suggests that a broad economic downturn is not a foregone conclusion and implies that the recent rebound wasn’t entirely about hopes for a more Fed. accommodating but also the plausibility of a soft economic landing.
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