Inside The Stock Market ...trends, cross-currents, and outlook
We found the spread between the “Expectations” and “Present Situation” series (the “Confidence Gap”) has historically moved almost in lockstep with the yield curve. As the Confidence Gap plummeted throughout 2021, the implication was the yield curve would soon follow. After some initial resistance, it did.
With less than a month to go, our hypothetical All Asset, No Authority (AANA) Portfolio seems likely to beat the S&P 500 on an annual basis for the first time since 2011. However, it’s doubtful that many real-world, institutional multi-asset portfolios were as heavily exposed as AANA to the best-performing assets—commodities and gold.
While VLT for the S&P 500 continued to trend lower in November, the DJIA calculation edged higher and triggered a new BUY signal. The message could soon get more confusing: A BUY signal for the Russell 2000 would be triggered if that index closes December above 1,813, while the S&P 500 and NASDAQ would have to climb more than 11% and 15%, respectively, to trigger a VLT BUY.
Our Major Trend Index has four factor categories, and three of them (Valuation, Cyclical, Technical) remain negative. Yes, the bearish “trifecta.” If that sounds like a reprint of one of our Monday MTI memos, bear with us (pun intended). We thought the MTI—with over 125 inputs—was pretty exhaustive. It turns out that it’s lacking entire categories pertinent to stock market action:
Last month’s inversion in the 10-Yr./3-Mo. Treasury spread further tilts an already lopsided scale in favor of a U.S. recession in 2023. That spread has been considered the gold standard from an economic forecasting perspective, and is the basis for the New York Fed’s Recession Probability estimate (which, by the way, should break above its critical 35% threshold when it’s published later this month.)
When the economy falls into recession, labor market measures will be among the last to tell us. We can’t resist watching them anyway, for two reasons. First, we know that the Fed’s self-proclaimed data dependency is unduly reliant on lagging data points, like the monthly employment report. We want to see what the policymakers are seeing, even if that sometimes means using the same, fogged-up rearview mirror.
No surprise here—October’s rebound put technicians on alert for a “breadth thrust” for at least the fourth time since the bear market began in January. On the whole, technicians have performed better than most this year, but their obsession with new and creative ways to capture the thrust phenomenon is a sign that even this normally flexible crowd is eager to get long(er) as soon as possible.
Some have speculated that 2022 might have been the kick-off for a decade-long era in which the broad stock market indexes will make essentially no progress, like 1966-1982. However, that earlier experience provided opportunities within other market segments, which will also stand a much better chance in coming years.
Boy, were the pundits ever right about the Roaring Twenties. Less than three years into the decade, the animal they fear most has already roared two times. Actually, the first one, in the first quarter of 2020, was more like a piercing “yap,” taking the S&P 500 down almost 34% in just 23 trading days. The second roar has been a deeper, more guttural one that’s lasted nine months and is probably not done.