Five Reasons Why the Market Hasn’t Bottomed Yet Despite the Recent Recovery

Just like in 2000-2002 and 2007-09, we are in the early chapters of this bear market

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What a fascinating day for the financial markets on August 10th. A clear failure on the downside of the stock and the core consumer price index (CPI) in the United States and it was the stock market that appreciated it the most.

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The most inflation-sensitive market, which is the long end of the Treasuries curve, gave up all of the rally early in the session. Even the front-end returned much of its post-report yield drop. But the stock market soared and the dollar fell on belief that the spike and return of inflation will somehow push the US Federal Reserve aside and lead to an economic landing in candy.

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Nothing could be further from the truth.

The current combination of monetary and budgetary restrictions… is unprecedented since 1960.

First, despite the comment from the last Federal Open Market Committee (FOMC) meeting that the central bank is “data dependent”, this is clearly no longer the case. Following the tame CPI release, we had the Fed’s biggest dove, Neel Kashkari of Minneapolis, come out and say his vote right now is for the funds rate to close the year to 3.9% and heading towards 4.4% cent in 2023.

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His Chicago Fed counterpart, Charles Evans, added that “we need to raise rates the rest of this year and next year.” So this rising stock and falling dollar is nonsense. What happened to “don’t fight the Fed”? I guess it works in a way for an Alfred E. Neuman stock market.

Second, the yield curve is still inverted by more than -40 basis points for 2s/10s. And the Fed remains determined to tighten its policy in this area and following consecutive quarters of negative gross domestic product (GDP) impressions (GDP is now decried as much as the yield curve). And then there is quantitative tightening to consider, which is on top of the equivalent of an additional 100 basis points of de facto Fed tightening this year. We know that the S&P 500 has a direct correlation of more than 90% with the direction of the central bank’s balance sheet.

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Third, the decline in inflation is not a good thing for equities since it is not accompanied by any change in tone from the Fed. There is an additional element of demand destruction here in this new disinflation that works against, not for, corporate profitability. Look at it this way: every recession leads to lower inflation. And there’s never been a recession without a bear market in equities, and more often than not, that means a 30-50% drop from the peak.

Fourth, the falling US Dollar helped risk trade on Wednesday, as the US Dollar Index fell 116 pips to 105.2 and broke below the 50-day moving average at most since early February. But at the time, as has long been the case, the 100-day trendline remained firm and that source of support lies at 103.5.

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Fifth, the stock market is trading on technicals (probably the case) or, if it’s fundamentals, then the “soft landing” view is gaining proponents. This second point is a dangerous proposition. Fed tightening cycles have led to recession 85% of the time in the past, but more than that the shape of the yield curve currently indicates a 100% chance and the streak of negative productivity performance we have views, and the implications this will have on the job market and forced corporate cost cuts, also have a 100% track record.

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The current combination of monetary and fiscal restraint, which has yet to be fully reflected on the demand side of the economy, is unprecedented since 1960. Growth in the money supply M1 and M2 is collapsing, the monetary base is collapsing contracts and all I keep hearing how nonfarm payrolls soared 528,000 in July. Never mind the brighter and darker message from back-to-back declines in full-time jobs evident in the rival household survey. Or the sign of stress from a simultaneous increase in credit card balances at an interest rate of over 15% and multiple jobs. Ideally ignored, but not by me.

Back to the Fed. The fact that two former doves can look so hawkish so soon after such a benign inflation report is a clear sign that the monetary authority is actually focusing on a different strategy than simply cutting inflation, which is will continue in the months to come. It’s a trick. The Fed is more about removing the punch bowl.

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This is to correct for inflated asset values ​​at this stage. As such, the answer is “no, we’re not there yet,” if the question is whether the S&P 500, Nasdaq, Russell 2000, Dow or NYSE have bottomed.

As was the case in 2000-2002 and 2007-09, we are in the first chapters of this book. Bear markets only end in the mature phase of a recession when investors see the whites of the recovery, only after the Fed cuts rates dramatically, and not until the yield curve is flat. steeply tilted (+140 basis points for the 2s/10s spread). Playing the long game means not waiting long for these features to appear.

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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