The S&P 500 surged higher by 4.26% this week with Friday's close at 4,130.29.
The index traded negatively until Wednesday, but was then off to the races from there. It's safe to say market participants, collectively, loved what they heard from Fed Chair Jerome Powell on Wednesday (click here).
In last week's Update we wrote that the "end to the month of July is going to be rather crazy, one way or the other" and said this about the Fed:
"At the end of the day, we believe the Fed will raise interest rates 0.75% and continue to speak to the market as if they've got a bullseye on inflation. If he does actually speak in a more "dovish" tone, implying that the Fed is prepared to "pivot" to counter the tightening-induced recession that runaway inflation has caused, we can see the S&P 500 trading up to the ~4,200 level in short order."
We didn't quite make it to 4,200, but if the week was one day longer we might have made it there! The S&P 500 climbed more than 1% on Wednesday, Thursday and Friday, collectively gaining 5.33% from Tuesday's close through Friday's close. Market participants seem to believe that the Federal Reserve of tomorrow is far more "dovish" than what was previously expected. The punch bowl is back!
What's ironic here is that we're not actually certain that Powell spoke to the market in a "more "dovish" tone".
The sentence from Powell that really seemed to get things moving to the upside was (hat tip Alfonso Peccatiello):
"We are now at levels broadly in line with our estimates of neutral interest rates and after front-loading our hiking cycle until now we will be much more data dependent going forward".
The market seemed to interpret this as a clear "Fed pivot", or a drastic change in sentiment where the Fed of the future is far more "accommodating" on the policy front. We've seen clear "Fed pivots" over the past few years in both late March and early April of 2020 (when they opened the money-printing spigot to fight off COVID) and January of 2019 (when they called off any and all interest rate hikes planned for the year).
Both "pivots" led to absurd short-term rallies for the S&P 500, much like what we saw this week, which ultimately grew into absurd long-term rallies and led to lasting bottoms for the S&P 500. This is why the trillion-dollar question now is...did everything change this past Wednesday? Is this absurd rally in the short term a sign of more to come, thus leaving June's low as a lasting bottom? We don't believe so. We actually don't believe much of anything changed on Wednesday, and we think we're still mired in a cloud of fog with zero visibility, but we certainly respect the fact that the market, collectively, knows a lot more than we do.
The issue here, in our opinion, is that to believe that the Fed of the future is truly going to be "easy", "accommodating" and "dovish", you also have to believe the data will support and allow for a more a more "dovish" tone.
To that we'd say: Where is the evidence? If inflation data is ultimately what will green light the "pivot", where's the evidence of "peak inflation" in the inflation data? It certainly didn't come on Friday (click here). It's almost as if the market believes inflation is so hot in the present that it can only be colder into the future, and that's probably a valid point. But the Fed wants it colder now, or more preferably yesterday, and they want it a lot colder.
As it stands now, the Consumer Price Index (CPI) could go flat for the remainder of 2022 and it would still be higher by 5.4% year-over-year in January of 2023's inflation report. If CPI grows at an annualized rate of 3% per year the remainder of 2022 we'll still finish 2022 with the CPI higher by more than 7% on a year-over-year basis. In other words, we're only one bad miss away on the inflation front from the now "data dependent" Federal Reserve probably having to consider another 0.75% or 1.00% rate hike in September. That's not something the market seemed to give much credence to the last three days.
Furthermore, a "dovish" Fed of tomorrow that is "data dependent" is only going to actually be "dovish" into a recessionary climate for the S&P 500. Collectively, the baseline scenario is still calling for the Fed to cut the federal funds rate in May and July of 2023 (click here). So even if the Fed has defeated inflation, thus justifying the "Fed pivot" here in July of 2022, clearly market participants are aware that they still have to deal with paying the costs of recession.
As far as we can tell, there are only two reasons the Fed would cut rates in 2023: Either the stock market is throwing a massive temper tantrum or the economic data they're "depending" on is coming in worse than expected...or both.
It's as though the case of a "dovish" Fed is a "be careful of what you wish for" scenario. It brings the relief rally now, but a "Fed pivot" is sort of the acknowledgment that more challenging times for the economy lie ahead and they're preparing for them.
As for the S&P 500, where are we now? Well, the index clearly broke out above our month-long trading range and closed above its 100-day simple moving average for the first time since early April. Ironically, we just recorded our first two-week winning streak since early April too, but everything that followed early April in terms of price action was nasty, and not in a good way.
When the S&P 500 climbs out of a hole from a correction, or "bear market", it does so by hurdling levels of "resistance" one by one until an uptrend is established. The move higher this week hurdled one level of resistance at ~3,945, but it now faces another hurdle at the ~4,100-4,200 region. This is where the S&P 500 stalled out and reversed lower in late May and early June, so we'll know if this time is different over the weeks ahead if there's actually follow-through to the upside (hence no selling pressure from the same price region where "resistance" was last seen) and the S&P 500 hurdles into the 4,200+ region.
What we also found interesting this week was the fact that it wasn't only stocks that moved to the upside.
What about 10-year Treasury bonds? They gained 0.94% and the yield on a 10-year Treasury bond closed at 2.67%, its lowest weekly close since early April. High quality investment-grade corporate bonds gained 0.86%. High-yield "junk" bonds gained 1.69%. Treasury Inflation-Protected Securities (TIPS) added 1.98% this week too.
How about commodities? The Reuters/Jeffries CRB index gained 3.88%. Gold? It gained 3.15%. Copper? It added 6.69%. Crude oil? It finished the week higher by 4.14%.
The week was stocks up, bonds up, commodities up. Even cryptocurrencies ripped to the upside! That's a good week for most all long-term investors' portfolios, but it's a mixed bag on the macroeconomic messaging front.
For example, if the "Fed pivot" is perceived to be based on the "peak inflation" narrative, then why did commodities spring back to life? Could it be that the commodity markets believe that the Fed is now taking its eyes off inflation, an unintended consequence of a more "dovish" stance? Did yields close at a three-month low because the Fed's front-loaded tightening cycle left the economy so weak that a severe recession is now upon us? The yield curve (as defined by 10s less 2s) finished the week still inverted and that's an ominous sign regarding the economy on a forward-looking basis.
The conundrum here is that lasting market bottoms tend to occur when the future for the economy can't be any worse than the present.
We don't believe that's the case right now; we believe the economy can get worse into the future, which is why we remain skeptical of this counter-trend rally off the June lows showing durability over the weeks and months ahead.
This could be attributed to the fact that we've been writing and calling for the S&P 500 to retrace back up toward the ~4,200-4,300 region for the last two months, so now that we're here the upside isn't all that surprising. If we stay here, implying selling pressure has vanished, and we move to test and sustain above the 200-day simple moving average...now that would be surprising. The price action in 2022 is best defined as "sell the rip" so if they don't "sell the rip" now, after the best rip of the year, then clearly something has changed.
In terms of sectors, energy was the big winner this week, rising by 10.22%. Exxon and Chevron ripped higher following earnings (click here). Utilities ripped 6.51% and the industrials, consumer discretionary, and technology sectors all gained more than 5%. Big tech earnings were mostly better than expected. Apple, Amazon, Google and Microsoft all had huge weeks to the upside.
The defensives lagged behind this week, with consumer staples and health care gaining less than 2%. The biggest laggard on the week was the communications sector, which only gained 0.68%. Meta (Facebook) fell -6.01% on the week (click here).
As for the week ahead, can the S&P 500 post a three-week winning streak?! It's another action-packed week with both the economic and earnings calendars jam- packed with market-moving data points and catalysts. Will "they" sell the rip or not, that's the question. Another exciting week awaits!
S&P 500 Primary Trend - Down...But!
The S&P 500 finished the month of July on Friday, gaining a whopping 9.11%.
This is the largest monthly advance since November of 2020's gain of 11.50% and it's the largest advance the month of July has ever recorded. Our work continues to label the primary trend as down, or "bearish", but there's at least a bottom on the monthly chart now with June's monthly close at 3,785.38.
We now have a top and a bottom on the monthly chart, so the trillion-dollar question is: What happens first...a monthly close above 4,766.18 or a monthly close below 3,785.38?
So the end of June brought us a quantitative study that supported the idea that a booming second half was upon us (click here), but it was a derivative of falling stock prices (i.e., when the S&P 500 falls 20% or more over a 6-month period it's been onward and upward from there).
The end of July now brings us more quantitative studies that support the idea that a booming second half is upon us, but it's attributed to rising stock prices.
The theory here is "strength begets strength". The buying stampede we saw this week should, in theory, only occur when market participants, collectively, have conviction in the idea of higher prices into the future. It doesn't mean they'll be correct though, that's where there's no guarantee (they are right more often than wrong though).
Since 1970 we have 14 other calendar months that gained 5% or more and finished with negative trailing 6- and 12-month returns. The picture, forward-looking, is almost exclusively white on the chart, implying the S&P 500's forward returns following these calendar months have been stellar. The index has closed higher 1 month later 12 of 14 instances for average returns of 2.32%. Forward 12-month returns are also higher 12 of 14 times for ridiculous average returns of 18.76%.
Much of that is skewed because the first month and year following a "bear market" bottom is typically the strongest of periods for the S&P 500, but that's sort of the point- maybe, just maybe, July's monthly gain of 9% is the first month following a "bear market" bottom.
Another neat tidbit from the table above: both July of 1962 and July of 1970 are on the list! From our Weekly Market Update dated June 26 we wrote the following:
"But we also have years like 1962 and 1970, two calendar years that closely "fit" the price action we've seen in 2022 thus far. The index gained a whopping 26.70% and 35.73% the second halves of 1962 and 1970 respectively. Sometimes your coach delivers a hell of a halftime speech, the second half is the total opposite of the first half, and your team goes from being clobbered to doing the clobbering."
July's rip to the upside only furthers the "fit" between 1962 and 1970 relative to 2022.
The price action between the three years has been remarkably similar through the first seven months of the year. We were down big at the half, but right now it appears whatever the coach said at halftime is working.
Putting it together, while our work continues to label the primary trend as down, or "bearish", there are a few rays of sunshine coming through the clouds.
We can't presume the climate has changed for the better, but there is some evidence to suggest the sun is trying to break through. Hey...perhaps inflation has peaked, and perhaps the Fed can become accommodative, and perhaps the economy (and consumer!) will do what it does best - show strength and resilience and get back to growing. It's not our base case scenario, not yet at least, but that's the narrative for the S&P 500 to truly have bottomed in June of 2022.
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