Inside The Stock Market ...trends, cross-currents, and outlook
If there’s a polar opposite to “Goldilocks,” this must be it. Not too hot and not too cold? What about both? Job growth and inflation are hot enough to force the Fed to follow through on its hawkish promises. But the leading indicators continue to warn us of oncoming cold. The odds that the porridge settles at the right temperature, without an intervening recession, look longer by the day.
If a new bull began in June, the August 31st “super-oversold” signal would be the first ever during the first three months after a bear market low. In 1962, such a reading occurred in the bull’s fourth month—which is probably why some analysts are now using that year as a possible analog for the rest of 2022.
How far might the S&P 500 fall in a recessionary bear market? The 2002 and 2020 stock market lows were both produced by “recessionary” bears; based on history back to the 1920s, those two lows stand out as the priciest bear market bottoms on record—and it’s not even close.
While our breadth measures do not consider this rally to be thrust-worthy, when based on nothing more than performance, it’s difficult to distinguish between the “first up-leg” in a new bull market and a bear-market rally. The vital signs at present appear to be more in-line with the latter (although making that conclusion based on price action, alone, is hardly better than a coin toss).
The LEI’s 3.6% six-month annualized loss through September 2006 was the largest decline not followed almost immediately by a recession. This year, the LEI contracted by 3.7% over the six months through June—if a recession is avoided in the current experience, it would be the most misleading signal in the history of the LEI as currently constructed.
The theory of “contrary opinion” is important to market analysis, but so is an understanding of its limitations. When investor-sentiment surveys dipped sharply in late January, we warned that the declines (which are usually signals to “buy”) might instead mark the beginning of an important trend change.
At the beginning of the year, we liked the chances for the “Donut Portfolio” to break its 10-year losing streak against the S&P 500. As a refresher, the Donut holds six of seven key assets in equal weights. The S&P 500 is excluded—a decision probably only suitable for allocators who are self-employed.
We apologize for that terribly misleading teaser of a title, but the bills for the stock-market mania of 2020-2021 are piling up. Inflation is one of them, lately increasing each month as relentlessly as cable TV used to. And for the 10% of households who own 90% of the stocks, market air-pockets such as June’s are like “surprise” medical bills: There’s rarely just one
As suggested in our June 24th, Chart of the Week, the peak in consumer inflation (+8.6% in May) has likely either occurred or is imminent. Consumers should thank the stock market, which in 2022 has taken up its occasional role as inflation-fighter after the Fed abdicated throughout 2021.