Hints of 1982 have one strategist saying the bear market is over: Morning Temporary
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Tuesday, August 2, 2022
When the closing bell rang final Friday, the S&P 500 registered its best monthly gain since November 2020.
The obvious enthusiasm from buyers in July may be perplexing given the financial and earnings backdrop going through the markets.
However for Tom Lee, co-founder and head of analysis at Fundstrat, the market’s latest rally makes excellent sense. Moreover, Lee argues, historical past means that we could also be at first of a extra forceful push larger into the tip of 2022.
“The largest takeaway for me on occasions of this week?” Lee requested in a word revealed on Friday, “Convincing and arguably resolution proof the ‘backside is in’ — the 2022 bear market is over.”
Final week, the Fed elevating rates of interest by another 0.75%. GDP information that showed a second-straight quarter of negative GDP growth. Current housing information showed a notable slowdown in arguably the economic system’s most vital sector. And looking out overseas, information broke that Russia further cut the flow of gas to Germany as Europe prepares for a doubtlessly frigid winter amid Russia’s struggle in Ukraine.
And but markets rose.
“When dangerous information would not take down markets,” Lee added, “it’s time for buyers to evaluate.”
This week started with information from FactSet out Monday exhibiting analysts making larger-than-normal cuts to 3rd quarter estimates. In different phrases, analysts are extra bearish than regular on company income. And this combination downgrade to earnings expectations comes amid high-profile flops from the likes of Meta Platforms (META) and Intel (INTC) during the last week.
Fundstrat’s optimism, nonetheless, extends past a view that hinges on the worst of the information circulation being over for buyers. Over the past a number of weeks, Fundstrat has been arguing the market setup is much like what buyers had been offered in August 1982 — a second that preceded a fierce rally in fairness markets amid a pivot from the Fed.
In the summertime of ’82, the U.S. economic system was within the throes of recession and then-Fed Chair Paul Volcker had not but signaled whether or not the Fed would ease up in its marketing campaign to sluggish inflation.
In October of that 12 months, Volcker signaled the Fed may mood efforts to sluggish inflation. “The forces are there that will push the economic system towards restoration,” the New York Occasions reported Volcker mentioned in a speech. “I might assume that the coverage goal must be to maintain that restoration.”
For buyers, “maintain that restoration” kicked off an almost 20-year bull market in shares. Two months earlier than the pivot, markets sniffed out the Fed’s plans — and in simply 4 months erased all losses from a 22-month bear market that noticed the S&P 500 fall 27%.
And this 40-year-old rally is why, in Lee’s view, the S&P 500 may very well be headed again above 4,800 and new file highs by the tip of this 12 months. Final week, Lee notes the bond market erased over 0.5% of anticipated rate of interest will increase from the Fed via subsequent spring.
“The bond market made a severe ‘dovish pivot’ in pricing Fed funds into 2023,” Lee mentioned. “Is it any marvel that fairness markets have discovered footing in July?”
Furthermore, Lee sees the market pricing in a progress scare versus a full-blown recession.
As was extensively mentioned through the spring, the S&P 500 falls 32%, on common, throughout a typical U.S. recession. Peak-to-trough, the S&P 500’s drop through the present drop from file highs reached 23%. And if recession is prevented, the 30%+ drop many buyers have been bracing for might by no means materialize.
Final week’s GDP information ignited a spirited dialog about whether or not the U.S. economic system was already in — or would fall into — recession. Two damaging quarters of GDP progress, on the very least, meets the standards of a “technical” recession. Although as we highlighted on Friday, economists at Financial institution of America outlined why a formal recession call is not seemingly within the offing anytime quickly.
Information from the manufacturing sector out Monday additionally added proof to the case for a progress slowdown however not essentially an outright recession.
Manufacturing progress within the U.S. fell to a two-year low in July, according to the Institute for Supply Management’s latest purchasing managers’ index (PMI). The PMI confirmed the biggest one-month decline within the tempo of worth will increase on file however nonetheless got here in at got here in at 52.8 — and any studying over 50 reveals growth within the sector.
Survey information from S&P International similarly showed a slowdown in manufacturing progress amid a notable downtick in inflation pressures, however this can be a trade-off the Federal Reserve made clear final week that they’re prepared to make.
“Provide chain issues stay a significant concern however have eased, taking some strain off costs for a wide range of inputs,” wrote Chris Williamson, chief enterprise economist at S&P International Market Intelligence. “This has fed via to the smallest rise within the worth of products leaving the manufacturing unit gate seen for almost one and a half years, the speed of inflation cooling sharply so as to add to indicators that inflation has peaked.”
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