The current economic and market cycle is anything but routine. Since the outbreak of Covid-19, we have seen the fastest 30% stock market crash ever, the shortest recession, the most aggressive fiscal and monetary response, the fastest doubling of the S&P 500 from an all-time bear market low, the highest inflation in decades, the most aggressive Federal Reserve tightening in a generation and the worst first half for stocks for half a century. Given all these superlatives and rarities in the recent past, historical models might not seem to offer much useful wisdom about how things might go from here, as a resilient stock market and picture of the Still-healthy employment rivals a resolute Fed and a deeply inverted Treasury yield. curve for the attention of investors. Yet markets are driven by an unchanging human nature that fuels the psychology of crowds interacting with repeated economic cycles. So historical beats are a big part of what market handicappers have to work with. And bears and bulls have their favorite precedents. The Bear 2000-2003 Those most skeptical of this rally keep the bear phase of the turn of the millennium at the forefront of their analysis. It was the unraveling of a booming, overvalued tech-centric stock market coinciding with a relatively shallow economic recession, but one that sparked a poor track record in corporate America. The Fed was steadily raising interest rates in 2000 to contain inflation in a fully employed economy, a similar but less dramatic version of the current arrangement. On a tactical level, technical analysts note the pattern of very strong bear market rallies that erupted along the way during the S&P 500’s long fall to nearly 50% declines in early 2003, which ultimately offered false hope that they represented a genuine background. A strong rebound in early 2001, after the S&P 500 fell more than 25% from its peak in March 2000, gained more than 20% and recouped almost exactly half of the index’s total losses to there, before converting to new lows in September. Technicians have generally been on the safe side of the market in recent months, with their approach of sticking to the prevailing trend keeping them above all cautious and quick to recommend selling on relief rallies. Strategas’ Chris Verrone took a detailed look at the strong but ultimately doomed rally of 2001 to say it lacked the kind of surge of momentum and shift in sentiment that would make the trend bullish, and sees the current rally under a similar day. BTIG’s Jonathan Krinsky pointed out that any rally that recovers 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 would climb another 2-3% above 4,230, a close test of bear resolution. In detail, today’s conditions do not correspond perfectly to those of 2000-2003, of course. Stocks this time around were more expensive than ever and were sitting on less heady long-term gains at the top. Right now, seven months into this market downturn, the S&P 500’s total annual return over the past five, 10, and 20 years is 12.6%, 13.6%, and 10, 5%. These are pretty healthy gains, and investors should recognize that the market has been good to them even after this tough time. After a similar time frame after the 2000 peak, the S&P had delivered 21%, 19%, and 17% annually over the previous five, 10, and 20 years, making mean-reverting forces so stronger. Aside from the early 21st century pattern, skeptics currently note that rapid Fed tightening cycles tend to keep stocks under pressure and S&P 500 valuations have rallied back above 17.5. times forward earnings after a brief stay below 16. While the S&P’s equally-weighted forward P/E remains below 16 (super-large-cap stocks inflate the index multiple), it is difficult to say that the market is exactly cheap. The 2010s experience A more optimistic view sees the current economy as experiencing nothing more than a deceleration and fear of growth, but without the accumulated excesses of corporate or consumer debt and debt. recklessness that would lead to a nasty slowdown. In 2010, the economy was considered fragile only about a year after emerging from a traumatic shock. Stocks were disgorging some of their quick gains from the market bottom and investors generally believed the Fed was cornered and would have to accept severe damage to the economy and corporate profitability to escape its predicament (then deflation, inflation now). It was also a year of midterm elections with an unpopular Democratic first-term president facing an unfavorable shift in the makeup of Congress. That year, as investors worried about systemic shocks to European economies, the S&P 500 fell 17% from a January high to a June low before recovering, first in a range sideways until fall, then with a strong upward push. The appeal of this precedent for bulls right now should be pretty clear, given the similar beats in the 2022 band so far. Ned Davis Research maintains a “cycle compound” chart for each year, combining the annual seasonal market pattern, the four-year election cycle, and the 10-year “decadal” trend. (Isn’t everyone aware that the years ending in “2” have seen many significant market reversals?) So far, this year’s trajectory generally follows the cadence of this composite cycle. – in direction and in timing, if not in scope. For what it’s worth, this framework corresponds to a June market low for 2022. For separate reasons, Ned Davis’ chief US strategist Ed Clissold moved 5% of his model portfolio into stocks from of cash, bringing stocks back to a target market weighting, largely based on some magnitude signals triggered in the rise from the mid-June low, noting on Tuesday: “The risk that the recent advance is just a rally in the bear market has not been eliminated. But… the technical improvement so far is more akin to a new cyclical bull market than a bear rally.” Such inflection points are only clear in hindsight, of course. But the June low had rare extremes showing a washed-out market of a sort that generally meant a very high probability of the S&P being higher 12 months from now. quarter saw their actions held up better than in nearly every quarter on record, a decent sign that the market had priced in plenty of bad news. The index is now, of course, already 13% higher from the June oversold low, so that doesn’t mean the market is heading straight up from here, by any means. Still, the band’s ability to gain ground on Friday after a quick reflex sell-off on the very strong monthly jobs report suggests that a widespread economic slowdown isn’t inevitable and implies that the recent rebound was not entirely linked to the hope of a more dovish Fed. but also the plausibility of an economic soft landing.