We are in a market where the macro environment is front and center.
The S&P500 is comfortably below its 50-day and 200-day moving average (MA), growth has reversed much of the gains from 2020 and energy is the only sector positive for the year. Inflation is at 40-year highs, oil went from $90- $129 in less than a month, as the FOMC arguably waited too long into this cycle to begin raising rates.
The FOMC is now boxed and must either abandon inflation concerns or growth concerns. Consumer sentiment is trending into recessionary levels, which means if the FED doesn’t address inflation, the consumer will do this for them. As if that’s not enough, the current war is potentially leading to a global sanction war that would all but guarantee a global recession.
Regardless, I still think the odds are higher that we see +5000 SPX before we see 3500 SPX, and the reason for this is due to the single most powerful force in equity markets – sentiment.
I know many will claim this time really is different, but many forget that similar excessive bearishness was present during Brexit, Grexit, the near collapse of the Euro zone, downgrading US debt, China collapses 1 and 2, double dip recession fears in 2012, as well as the 2016 global slowdown and political shift that brought about cries of a 50% drawdown. In fact, it really was different in 2009 as well as 2020, yet the market marched higher and never looked back, regardless of the data and extreme bearishness.
For the first time since 2020, we have sentiment depressed enough to propel us higher, and it is only from such states of despair that deep corrections find bottoms and begin to march higher. If you have ever said to yourself, “this market makes zero sense,” then you indirectly understand that fundamentals do not always drive market moves. I believe the time will come soon, that many will be saying the same phrase as we begin to march higher in light of the ongoing negative news cycle.
Bear Market or Correction?
The debate is whether this is a correction or the start of a secular bear market. If this is the start of a secular bear market, it will be the first one in history that the equity market sees before the bond market. Yes, the yield curve is flattening, but it has not indicated that the FED has made a catastrophic mistake that would all but insure a recession. The equity market has historically and consistently been the final market to wake up to the macro picture, with the bond market usually being the first.
As of today, the 30-year yield is making a new high. Unlike the short end of the curve, the longer out you go, the more rates are controlled by growth/inflation. The 30-year has been in a prolonged downtrend, until recently, suggesting that inflation AND growth do not warrant a coming recession, yet.
The spread between the 10/2 year is the flattest we’ve seen since October of 2018. This is not ideal, and this trend is moving towards an inversion. However, we have not inverted, yet.
What history has shown us is that once the yield curve inverts, the economy falls into recession, on average, between 9-24 months from the first inversion. Also, surprisingly, some of the best gains within a bull market happen in that final +1 year period after inversion.
Also, this would be the first bear market that triggers while the economy is still expanding, and earnings are surprising to the upside. In fact, over 75% of the stocks in the S&P 500 provided upward surprises, as many talked about raising their prices and increasing production to meet the demand in the global economy.
