David Rosenberg: Why the bear market rally is unraveling

Recession bear markets don’t end until the end of the Fed’s easing cycle, which looks more and more like a 2024 event

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The countertrend market rally really took off in mid-June. Why? Because that’s when markets started to believe that the US Federal Reserve, by pre-fueling rate hikes, was setting the stage for an earlier break and pivot, which was reinforced by considering Jay Powell’s later comments regarding “data dependency” as meaning the potential for a break.

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It was then that Mr. Market began to forecast two full rate cuts for 2023. The 2/10 yield curve slanted positively by 13 basis points, and the strength of the US dollar began to weaken. weaken. High yield spreads entered a period of compression as visions of a soft landing danced through everyone’s minds. And 10-year real yields, the poster child for financial tightening, kicked off the other day in a two-month fall from 63 basis points to 36 basis points.

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But, alas, there are plenty at the Fed who come out and sound more hawkish than the president and more than the tone of the published set of Federal Open Market Committee (FOMC) minutes. No no no. The Fed isn’t done, and some are openly saying they’re ready to vote for another 75 basis point hike at the September 20-21 meeting.

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Just as the S&P 500 tested its 200-day moving average, reversed 50% of the bear market decline in the first half of the year, and saw over 90% of its members break above the 50 days (not to mention the CNN Fear & Greed Index moving up the Greed column), the index has now hit the wall. No kidding. A multiple P/E expansion of nearly three points in two months doesn’t exactly happen every day.

History rhymes. remember that

Also keep in mind that since the June lows, four stocks have done the heavy lifting for the S&P 500 – Apple Inc., Microsoft Corp., Amazon.com Inc. and Tesla Inc. Together these companies account for 18% share of the index (based on market cap), but accounted for 30% of returns. This is indicative of unbalanced participation and is not a healthy sign – it is a prime example of Bob Farrell’s Market Rule #7: “Markets are strongest when wide and weakest when they boil down to a handful of top names.”

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But now the real interest rate is rising. High yield bond spreads are starting to widen again. The US dollar is beginning to strengthen. Earnings estimates are down and forecasts are generally poor. Global demand is clearly fading as the Commodity Research Bureau (CRB) index stood at 625 at the mid-June FOMC meeting and fell to 588 today. And the futures market fears the Fed again, as those high hopes of a resumption of the easing cycle in 2023 have fallen through – now giving only a 65% chance for a cut and not before the end of next year.

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History rhymes. Remember that. And the real fundamental bottoms in the stock market tend to happen after the last Fed rate cut, not the first. The rally after the break and the rally after the first easing are always fakes. Stock markets bottomed when the Fed eased aggressively enough to take the 2/10 curve to +140 basis points on average and median. The futures market is now saying that this first rate cut won’t happen until the end of 2023, so how is it even possible that the S&P 500 will bottom out this year or even next?

The “don’t fight the Fed” refrain works both ways. And the recessionary bear markets, to reiterate, don’t end until the end of the Fed’s easing cycle, which looks more and more like a 2024 event.

Play the long game by being patient, being nimble as intermittent rallies come and go, and focusing primarily on capital preservation. The ultimate lows and the next fundamental bull market could well be two years away. Think 1973-75, think 1980-82, think 2000-2002, and think 2007-09.

David Rosenberg is the founder of independent research firm Rosenberg Research & Associates Inc. You can sign up for a one-month free trial on the Rosenberg website.


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