Young Bull Or Old Bear?
This is an excerpt from our Aug. 17, 2022?Morning Briefing.
There is a fierce debate going on between the stock market’s bulls and bears. The question under consideration is whether the rally since June 16 is a new bull market or just a rally in the bear market that started on January 3? Over this period, the S&P 500 fell 23.6% from its record high of 4796 to 3666.
Joe and I think a new bull market started on June 16, with the S&P 500 up 17.4% through yesterday’s close of 4305 (Fig. 1 and Fig. 2). The S&P 500 is now only 10.2% below its record high on January 3. It rose above its 50-day moving average (dma) on July 19. It is now less than 1% below its 200-dma.
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If the S&P 500 fails to rise meaningfully above its 200-dma, the bears undoubtedly will conclude that the next stop will be a retest of the devilish low, possibly on the way to a new low before the bear market finally ends. They have the calendar on their side because September tends to be the worst month for the stock market. Since 1928, the S&P 500 has dropped 1.0% on average during the month (Fig. 3).
From a fundamental perspective, the bears expect that inflation will remain elevated, forcing the Fed to raise interest rates much higher, causing a severe recession. The bulls, like us, believe that inflation might have peaked in June and that the Fed is likely to pause for a while following one more rate hike of 50bps-75bps in late September. The bears see lots more downside for earnings and valuation multiples. We see flattening corporate earnings through the end of this year and believe that forward valuation multiples bottomed on June 16. In our bullish narrative, the market could move sideways for a while before moving to new record highs next year.
Bear-market rallies tend to occur during long bear markets, which occur during long recessions when investors’ hopes for an end in sight are dashed (Fig. 4 and Fig. 5). Arguably, the S&P 500 discounted a recession during the first half of the year, which so far looks like a short “technical recession,” with real GDP down just 1.6% (saar) and 0.9% during Q1 and Q2. The rally since June 16 will turn out to be a sustainable bull market if inflation is peaking, implying that the Fed is almost done tightening and won’t have to trigger a recession to bring inflation down. If that happy scenario doesn’t play out, the bears will have a field day.
Vice President, Senior Investment Advisor | Chartered Financial Analyst?
2 年Thanks for posting! Many clients are asking this very question.
Berater der Generaldirektion bei Bank Thaler AG
2 年??????
Co-Owner at Lekkerkerker Asset Management, Independent Advisory (NL & SG based) on #macroeconomics #microeconomics, EM Investor, Ukraine & Russian language speaker. PhD. Macroeconomics, PhD. Microeconomics
2 年In my opinion adding a new quote, esteemed Dr. Edward Yardeni : "when the young bear meets the old bull, then the markets tend to lull"
Dr. Ed. New bull markets don't usually begin at 19 times next years earnings. Or with inverted yield curves. Or with unemployment at 3.5%. Furthermore they usually start with the liquidation of bad debt. This liquidation usually frees up capital to begin anew and start fresh. I think we need more time Dr. Ed. I could be wrong, I often am.