How to spot a market bottom

Did the stock market make a meaningful bottom last week? Financial markets had been taking a risk-off tone coming into the week, but when the Powell Fed was slightly more hawkish than expected, the market rallied.    The S&P 500 was -14.6% peak-to-trough on an intraday basis in 2022. Ed Clissold of Ned Davis Research pointed...

Not your father’s commodity bull

Some chartists have recently become excited over the commodity outlook. Setting aside the headline-driven rise in oil prices, the long-term chart of industrial metals like copper looks bullish. Copper is tracing out a cup-and-handle pattern breakout that targets strong gains in the years ahead. Moreover, the one-and the two-year rate of change, which is designed...

An energy and geopolitical recession?

Much has happened in the space of a week. In the wake of Russia's Ukrainian invasion, the West has responded with a series of tough sanctions designed to tank the Russian economy. Energy and other commodity prices have soared and this is shaping up to be another energy and geopolitical crisis. The last three episodes...

Can the Fed engineer a soft landing?

Stock market pullbacks happen. The normal equity risk of pullbacks is the price investors pay for better long-term performance. But a recent analysis by Oxford Economics found that the average S&P 500 pullback during non-recessionary periods is -15.4% and -36% during recessions.     Here is why this matters for equity investors. The recent peak-to-trough...

A recession in 2023?

The Fed has spoken by pivoting to a more hawkish trajectory for monetary policy. The FOMC announced that it is doubling the scale of its QE taper, which puts the program on track to end in March. The December median dot-plots show that Fed officials expect three quarter-point rate hikes in 2022 and three quarter-point...

How small caps are foreshadowing the 2022 market

Small-cap stocks have lagged their large-cap counterparts in 2021. Even as the S&P 500 steadily rose to fresh highs this year, the Russell 2000 and S&P 600 finally staged upside breakouts in November out of a multi-month trading range, but they have struggled to hold those breakouts. Small-cap relative performance peaked in March, but they...

Making sense of the Great Resignation

An unusual labor market shift has occurred since the onset of the pandemic. Employers everywhere are complaining about a lack of quality employees. The Beveridge Curve, which describes the relationship between the unemployment rate and the job opening rate, has steepened considerably.      Workers are not returning to their jobs, at least not without...

Where are we in the market cycle?

Where are we in the market cycle? The accompanying chart shows a stylized market cycle and changes in sector leadership. Bear markets are characterized by the leadership of defensive sectors such as healthcare, consumer staples and utilities. Early-cycle markets are sparked by the monetary stimulus or the promise of monetary stimulus. The market leaders in...

Team Stagflation, or Team Transitory?

Stagflation fears are rising again. It's a natural reaction to the short-term data. September headline CPI came in hot, though the core CPI print was in line with expectations and PPI was soft. Inflation expectations are spiking...     ...while the Atlanta Fed's GDP nowcast is plummeting. Consumer confidence is dropping, driven by supply chain...

Will the energy price surge cause a recession?

As energy prices surged around the world, I had an extensive discussion with a reader about whether the latest price spike could cause a recession. This is an important consideration for investors as recessions are equity bull market killers.   The evidence isn't clear. On one hand, every recession in the post-War period (shaded grey...

Time for a mid-cycle swoon?

The S&P 500 fell as much -4% from its all-time high in Evergrande panic pullback last week. Is the recent weakness just typical seasonal weakness or something more serious? The intermediate-term breadth looks disconcerting. The percentage of S&P 500 stocks above their 200-day moving average (dma) had been at the 90% level which indicates a...

Not your father’s stagflation threat

Stagflation worries are rising. A recent analysis of search activity shows that searches for stagflation have spiked compared to other inflation search terms.     The latest BoA Global Fund Manager Survey also shows that stagflation concerns are rising.     These fears are misplaced. The conventional mechanisms for stagflation are not present. Instead, investors...

A time for caution, or contrarian buy signal?

Recently, a number of major investment banks have published warnings for the US stock market. The strategists at BoA, Citigroup, Credit Suisse, Deutsche, Goldman Sachs, and Morgan Stanley have issued either bearish or cautionary outlooks.  On the other hand, Ryan Detrick at LPL Financial documented the effects of strong price momentum on stock prices. History...

Constructive value and reflation green shoots

One of my principal tools of market analysis is the use of trend-following techniques to spot changes in macro conditions. My models are seeing some early green shoots in the value and reflation trade. It began with the stronger than expected July Jobs Report. The subsequent tame core CPI print also helped to reinforce the...

What you should and shouldn’t worry about

The S&P 500 took fright last Monday and skidded -1.6% after falling -0.8% the previous Friday. Talking heads attributed the decline to worries about the rising incidence of the Delta variant around the world.     Fears over the Delta variant slowing economic growth are overblown. However, there are two other key risks that equity...

How to engineer inflation

Both the June CPI and PPI came in hot and well ahead of expectations. There was the inevitable debate about the transitory nature of the price increases. Looking longer-term, however, the conventional models for explaining inflation have been unsatisfactory.   Notwithstanding the numerous failures by Japanese policymakers, consider the US as another example. Let's begin...

Seven reasons to fade the growth scare

It is astonishing to see the market narrative shift in the space of only a few months from "inflation is coming" to a growth scare. In late March, the 10-year Treasury yield topped at over 1.7% and the 2s10s yield curve was steepening. Today, the 10-year has decisively broken support and the yield curve is...

How to navigate the mid-cycle expansion

It's been over a year since the stock market bottom at the height of the Pandemic Panic. The market consensus has evolved from an early cycle recovery to a mid-cycle expansion, as evidenced by the BoA Global Fund Manager Survey.     What that means for investors? Here are the key questions we focus on:...