1982 signs have a strategist saying the bear market is over: Morning Brief

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Tuesday, August 2, 2022

Today’s newsletter is from Myles Udland, Senior Markets Editor at Yahoo Finance. Follow him on Twitter @MylesUdland and in LinkedIn.

When the closing bell rang last Friday, the S&P 500 posted its best monthly gain from November 2020.

The apparent enthusiasm of investors in July can be disconcerting given the economic and earnings environment facing the markets.

But for Tom Lee, co-founder and head of research at Fundstrat, the recent market rally makes a lot of sense. Furthermore, Lee argues, history suggests we may be at the start of a stronger push towards the end of 2022.

“The biggest takeaway for me from this week’s events?” Lee asked in a note published on Friday: “Compelling evidence and possibly ruling that ‘bottomed out’: 2022 bear market is over.”

Last week, the Fed raised interest rates by another 0.75%. GDP data that posted a second consecutive quarter of negative GDP growth. Recent housing data showed a noticeable slowdown in possibly the most important sector of the economy. And looking abroad, it became known that Russia further cut off the flow of gas to Germany as Europe braces for a potentially frigid winter amid Russia’s war in Ukraine.

And yet the markets rose.

“When bad news doesn’t bring markets down,” Lee added, “it’s time for investors to take stock.”

This week began with FactSet data released on Monday showing analysts make larger than normal cuts to the third quarter estimates. In other words, analysts are more bearish than usual on corporate earnings. And this added downgrade to earnings expectations comes amid high-profile failures by companies like Metaplatforms (GOAL) Y Intel (INTC) during the last week.

Fundstrat’s optimism, however, extends beyond a view that hinges on the worst of the news flow being over for investors. For the past few weeks, Fundstrat has been arguing that the market setup is similar to what investors were presented with in August 1982, a moment that preceded a fierce rally in equity markets amid a turnaround in the Federal Reserve.

In the summer of 1982, the US economy was in the throes of a recession, and then-Fed Chairman Paul Volcker had yet to indicate whether the Fed would relax its campaign to curb inflation.

Federal Reserve Board Chairman Paul Volcker stands with his hands on his hips and smokes a cigar during a meeting in Washington, 1982.

Federal Reserve Board Chairman Paul Volcker stands with his hands on his hips and smokes a cigar during a meeting in Washington, 1982. (Getty Images)

In October of that year, Volcker pointed to the Fed could moderate efforts to curb inflation. “There are forces that would propel the economy toward recovery,” the New York Times reported Volcker as saying in a speech. “I think the policy goal should be to sustain that recovery.”

For investors, “maintaining that recovery” kicked off a nearly 20-year bull market for stocks. Two months before the pivot, markets spotted the Fed’s plans and in just four months erased all losses from a 22-month bear market in which the S&P 500 fell 27%.

And this 40-year rally is why, in Lee’s opinion, the S&P 500 could break back above 4,800 and hit new all-time highs later this year. Last week, Lee notes that the bond market erased more than 0.5% of the expected Federal Reserve interest rate hikes through next spring.

“The bond market did a serious ‘dovish turn’ in federal funds pricing through 2023,” Lee said. “Is it any wonder the equity markets found equilibrium in July?”

Source: Fundstrat

Source: Fundstrat

Additionally, Lee sees market prices in a growth scare rather than a full-blown recession.

As discussed extensively throughout the spring, the S&P 500 falls 32%, on average, during a typical US recession. From peak to trough, the S&P 500’s decline during the current decline from all-time highs reached 23% . And if recession is averted, the 30+% drop many investors hoped for may never materialize.

Last week’s GDP data ignited a lively conversation about whether the US economy was already in recession, or would slip into it. Two negative quarters of GDP growth, at a minimum, meet the criteria for a “technical” recession. Although, as we highlighted on Friday, economists at Bank of America described why a formal recession call it’s not likely to be in the offing any time soon.

Manufacturing data released on Monday also added evidence to the case for a slowdown in growth, but not necessarily an outright recession.

US manufacturing growth fell to a two-year low in July, according to the latest Purchasing Managers Index from the Institute for Supply Management (PMI). The PMI showed the biggest drop in a month in the pace of price increases on record, but still came in at 52.8, with any reading above 50 showing expansion in the sector.

S&P Global survey data also showed a slowdown in manufacturing growth amid a notable drop in inflationary pressures, but this is a tradeoff that the Fed made clear last week that they are willing to make.

“Supply chain issues remain a major concern but have eased, taking some pressure off prices for a variety of inputs,” wrote Chris Williamson, chief business economist at S&P Global Market Intelligence. “This has been reflected in the smallest increase in the price of goods leaving the factory gate seen in almost a year and a half, the rate of inflation has cooled sharply to add to signs that inflation has hit ceiling”.

what to see today

economic calendar

  • 10:00 a.m. Eastern Time: JOLTS job offersJune (11,000 million expected, 11,254 million during the previous month)

  • Total vehicle sales of the districts (13.4 million expected, 13 million during the previous month)



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