Today, lets assess the market from a number of perspectives with an eye on determining the most likely outlook in the coming months. I’ll discuss everything from trend analysis, black swans, fundamentals, bonds, seasonality and market cycles. Lots for you to consider today!
I won’t be finishing with a conclusion. Only to echo Jay Kaeppel’s closing words in our interview (to be posted soon): “The next 10 years will be challenging for buy & hold investors”.
As an aside–I will do a Bear-o-meter reading before this week ends. So take THAT reading, which incorporates various sentiment and breadth studies not covered below into consideration in ADDITION to to factors I discuss below:
Inflation
Lets face it. The market is very tied to the Fed’s monetary decisions. So, its important to get a handle on what inflation is doing right now. If inflation is rising, that’s bad for markets. If its falling, that’s good for markets. If its stuck at a higher than historic level – trapped within an economic recession – this implies stagflation. It implies rates will not be declining or rising- that’s the 1970’s! In a nutshell:
Rising inflation = rising rates = market downside.
Falling inflation = falling rates = market upside.
Stagflation = high inflation without continued rising rates due to recession = sideways market (aka the 1970’s)
The CPI chart below suggests inflation has leveled off and is showing signs of declining. It will likely decline further from here. The question is – by how much…and will that be enough to lower (rather than stabilize) rates?
USD
Its the world currency reserve. A declining dollar implies less money flowing into US bonds and securities. It looks to me like the USD has reached a major support level. It may level off from here – yet remain much lower than levels seen last year. Not great for US securities, but that’s not bad news at all for emerging markets. Do you subscribe to our VT newsletter? I hope you do. Those who get the VT update newsletter will have read our sector rotation comments, including our bullish view on the EM’s. Subscribe here.
Earnings
Hate using the “F” (fundamentals) word. But, over time the market will rally around earnings. Rising earnings – or anticipation of such – is bullish. Declining earnings, not so much. Perhaps, having seen earnings rise parabolically after the COVID spend-a-thon, we are starting to see a regression. Will SPX earrings go to the bottom of the channel- below?
Also, to continue dropping the F-bombs: Take a look at the current Shiller PE (earnings adjusted for inflation). Its coming down, but still about double its long termed median average of about 16 (charts courtesy www.multpl.com).
Bonds
The 60/40 balanced portfolio was spanked hard last year. Investors couldn’t turn to bonds as a safe refuge. Bonds now look like they are starting to stabilize…BUT…the last peak on the TLT has yet to be successfully tested and broken. Note that the great bull market in bonds corresponded with a general bull market in equities. Easy money by the Fed didn’t hurt. Seasonality isn’t great for bonds right now…
Breadth
Market breadth – as measured by the broad NYSE composite looks to be improving vs the cap-weighted SPX. Its in the very early point of breaking out (breaking through its last peak of about 15,900). Note the moneyflow box is breaking out (vs the SPX moneyflow, seen in the chart under the “trend” heading, is not).
On my video interview with Jay Kaeppel – coming out soon- I discuss this index deviation. Another breadth tool – the Dow transports vs Industrials – will be discussed in my upcoming Bear-o-meter blog. Some positives in breadth look to be coming out.
Presidential cycle
Year 2 / mid-term / of the 4-year presidential cycle is historically the worst for markets – and that statistic was well represented in 2022. Year 3 – meaning this year- is the typically best in the cycle (13.5% average return). So, that’s a plus!
Seasonality
You know the “Best six month” cycle. When it snows (November) in you go. Sell in May, go away. All that stuff. The winter months tend to do better on average for markets than the summer months. It doesn’t always work. But, over time it makes sense. The period from March to May can be particularly good. We are a month away from that period.
Trend
Until the SPX breaks 4100 with conviction, I’m unable to call this anything but a bear, or a sideways consolidation. Full stop. Meanwhile, moneyflow doesnt look encouraging (bottom pane).
Recession
The yield curve is inverted. The 1 month, and 3 month/10 year US Treasury is 100 bps inverted !!! – see below.
1 month @ 4.5%,
10 year @ 3.5%.
Since 1960, there has never been such an inversion that wasn’t followed by recession (bespoke).
LEI “Leading Indicator Index” by Bespoke is at the same level it saw before the 2008-2009 recession (below the 0-line = recession probability).
Housing prices are falling as well–especially in Canada. See my recent blogs here. Of note – New Home Sales in the USA are starting to improve per this link
Black swan events
You can’t predict a Black Swan event. That’s why they are called black swans…(duh!). Having said that – a few not-so-unknown factors coming soon:
- Russian / Ukraine war escalation see this blog
- US government debt ceiling standoff – much more polarized house than past standoffs. This gridlock could be bigger than expected.
- Bigger recession than expected
- The potential of an EWT “C” wave final washout (see my blog here).
- China/USA conflict possibility*
- The potential failure of the Iranian regime
- The possibility of a military coup in Turkey
- Globalization, government overreach – pushback by world citizens (WEF “Great Reset”, COVID leverage, etc)
* A top Republican in the U.S. Congress said on Sunday the odds of conflict with China over Taiwan “are very high” after a U.S. general caused consternation with a memo that warned that the United States would fight China in the next two years. memo dated Feb. 1 but released on Friday, General Mike Minihan, who heads the Air Mobility Command, wrote to the leadership of its roughly 110,000 members, saying, “My gut tells me we will fight in 2025. — Reuters.
