June 12, 2023

There have been several high-profile pronouncements that the stock market has begun a new bull market. Our view is that while this may be true, it is yet too soon to draw that conclusion with high conviction.

First let’s look at the chart below. There are some positives, no doubt. But there are also some hurdles to be cleared before we’re out of the woods.

Technically, the market is up 20% from its October low which is what is driving the “new bull market” calls. Also bullish is the fact that the market price is trading above both the 50-day moving average (blue line) and the 200-day moving average (orange line). Moreover, the so-called “golden cross” when the 50-day moving average crossed up through the 200-day moving average, occurred in January of this year. All of these things are bullish.

But, before we put the nail in the coffin of the bear market, consider the following:

1. The market P/E multiple on forward earnings is 25x. This is rich.
2. The market breadth is narrow. Consider the fact that the S&P 500 Index total return is +13% YTD, while the equal-weighted S&P 500 is up about 3.25%. Only a handful of technology and AI stocks are driving the market higher. Here is the chart:
3. There remain certain “technical barriers” that need to be breached. The S&P 4300 level is important as is the all-time high of 4800. The stock market drawdown will be over when it crosses and holds above 4800. We are still 500 points below this level.
4. Interest rates may still need to move higher in the Fed’s ongoing inflation battle.
5. Forward earnings expectations are still very murky, and the threat of recession is still very real. Importantly, the yield curve remains steeply inverted, which is a strong and reliable recessionary indicator. We are taking a “wait and see” approach to earnings and recession for the remainder of the year. If we are headed to recession it will manifest at some point between now and December.

 

Concluding remarks

Investing is a long-term proposition. None of the items discussed above negate this basic premise. While these things we’ve discussed in this note are interesting and do affect the decisions we make at the margin (like rebalancing and the riskiness of new securities we purchase for our clients), they really have no bearing on a long-term investment portfolio based upon your financial plan. We will get some additional perspective this week with the most recent data on inflation, which should provide some additional insights into the likely direction of Fed policy. In the meantime, enjoy your summer and thank you for your patronage.

 

 

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