There has been nothing routine about the current economic and market cycle. Since Covid-19 appeared, we’ve seen the fastest 30% stock market drop ever, the shortest recession, the most aggressive fiscal and monetary response, the fastest doubling of the S&P 500 from a bearish low of history , the highest inflation in decades, the Federal Reserve’s strongest tightening moves in a generation and the worst first half of the year for equities in half a century. Given all these superlatives and rarities in the recent past, historical patterns may not seem to offer much useful wisdom about how things might go from here, as a resilient stock market and a still-healthy employment picture they compete with a determined Fed and a deeply invested Treasury yield. attention curve of investors. Still, markets are driven by the immutable human nature that drives crowd psychology that interacts with repeated economic cycles. So historical rhythms are a big part of what market handicappers have to work with. And bears and bulls have their favorite precedents. The Bear 2000-2003 The most skeptical of this rally keep the bear phase of the turn of the millennium at the forefront of their analysis. This was the unfolding of an exuberant, overvalued tech-focused stock market coinciding with a relatively shallow economic downturn, but one that led to a nasty reckoning in corporate America. The Fed raised interest rates steadily in 2000 to curb inflation in a fully employed economy, a similar but less dramatic version of the current deal. At the tactical level, technical analysts look at the pattern of very strong bear market rallies that erupted along the way during the S&P 500’s long slide to a nearly 50% drop in early 2003, which eventually offer a false hope that they represented. a genuine fund. A strong rally in early 2001, after the S&P 500 had fallen more than 25% from its March 2000 peak, gained more than 20% and recouped almost exactly half of its total losses of the index up to this point, before resorting to new lows for that September. Technicals have generally been on the right side of the market in recent months, their focus on bucking the prevailing trend mostly keeping them cautious and quick to recommend selling on breakout rallies. Strategas’ Chris Verrone took a detailed look at the strong but ultimately doomed 2001 rally to say it lacked the kind of momentum and sentiment shift that would make the trend bullish, and sees the current rally in a similar light. BTIG’s Jonathan Krinsky noted that any rally that retraces more than half of the total decline on a closing basis tends to mean that a bear market is likely over. In the current setup, that would mean the S&P rises another 2-3% above 4,230, a close test of bear resolve. In detail, the current conditions do not perfectly match those of 2000-2003, of course. This time, stocks were never so expensive and were sitting on less heady long-term gains at their peak. Right now, seven months after this market pullback, the S&P 500’s annualized total returns over the past five, 10 and 20 years are 12.6%, 13.6% and 10.5%. Those are pretty healthy gains, and investors should recognize that the market has been good to them even after this rough patch. After a similar period of time after the peak in 2000, the S&P had delivered 21%, 19% and 17% annually over the previous five, 10 and 20 years, making the forces of mean reversion . much stronger Aside from the early 21st century template, skeptics right now note that rapid Fed tightening cycles tend to keep stocks under pressure, and S&P 500 valuations are back above 17.5x forward earnings briefly below 16. Equal-weighted S&P forward P/E remains below 16 (large-cap stocks are inflating the index multiple), it’s hard to argue that the market is exactly cheap. The experience of the 2010s A more optimistic view sees the current economy experiencing nothing more than a slowdown and growth scare, but without the accumulated excesses of corporate or consumer leverage and recklessness that would cause a nasty recession . In 2010, the economy was seen as fragile just a year or so after emerging from a traumatic shock. Stocks were shedding some of their rapid gains from the bottom of the market and investors generally believed that the Fed was cornered and would have to accept severe damage to the economy and business profitability to escape its predicament (then deflation, inflation now). It was also a midterm election year with an unpopular first-term Democratic president facing an adverse change in the makeup of Congress. That year, with investors worried about systemic shocks in European economies, the S&P 500 fell 17% from a January high to a June low before recovering, first in a sideways range to the fall and then with a strong upward push. The appeal of this precedent for bulls right now should be pretty clear given the similar paces of the 2022 tape so far. Ned Davis Research maintains a “composite cycle” chart for each year, which combines the annual seasonal market pattern, the four-year election cycle, and the 10-year “decadal” trend. (Doesn’t everyone know that years ending in “2” have featured many significant market changes?) So far, this year’s path generally follows the cadence of this set of cycles, in direction and timing if not in magnitude. For what it’s worth, this frame is in line with the June market low for 2022. For different reasons, Ned Davis chief US strategist Ed Clissold moved 5% of his model portfolio into stocks of cash, taking the stock to a target market weight, based largely on some signs of breadth turned on the ramp from the mid-June low, noting on Tuesday, “The risk that the recent advance is only a bear market rally has not been ruled out. But … the technical improvement to this point looks more like a new cyclical bull market than a bear market rally.” These turning points are only clear in retrospect, of course. But the June low featured some rare extremes that showed a market wipeout of a type that has typically meant a very high probability of a 12-month high for the S&P. And companies that missed earnings forecasts this quarter saw their shares hold up better than in almost any quarter on record, a decent sign that the market had priced in a fair amount of bad news. The index is now, of course, 13% higher than the June oversold low, so that doesn’t mean the market is headed straight from here, by any means. Still, the tape’s ability to gain traction on Friday after a quick sell-off reflecting the very strong monthly jobs report suggests that a broad economic downturn is not a foregone conclusion, and implies that the recent rally is not going away. relate entirely to hopes for a more dovish Fed. but also the likelihood of a soft economic landing.
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