(Bloomberg) — U.S. stocks have defied skeptics and rallied this year amid bank failures, lingering recession fears and what is expected to be the worst corporate earnings trajectory in years .
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One possible explanation for why this is happening is that things may not be as bad as they seem. In fact, according to a Bloomberg Intelligence model known as the Economic Regime Index, America’s worst economic woes appear to have happened months ago.
The index analyzes monthly changes in the main inputs that cause a recession, including capacity utilization, jobless claims, output and sentiment. This suggests that an economic recession may have started in June and bottomed out in December. While the model is still pointing to weakness in the economy, the outlook for the S&P 500 index is favorable until it remains above the lows in late 2022, BI says.
“This could be contentious as it sparks a debate about whether we are in, heading for, or have been in a recession,” said Gillian Wolff, senior associate analyst at BI. “The macro landscape appears to have peaked at the end of 2022, so going forward there is likely to be significant support for equities.”
Looking at the eight recessions since 1970, the S&P 500 returned an average of 8.9% in the three months after the BI model bottomed out — and 20% in the 12 months after that bottom. The broad equity benchmark is up 7.8% this year.
Investors are increasingly confident that sometime this year the Federal Reserve will end the cycle of rate hikes that fueled the S&P 500’s 19% fall in 2022, the its worst performance since 2008.
“Fighting the Fed” has been a successful strategy for months, and stocks rose as the central bank raised interest rates to the highest level since 2007. as the beginning of a bull market. Not only that, the VIX index — known as the market’s gauge of fear — is at its lowest since January 2022, and put-to-call ratios are falling, meaning the appetite for hedging against losses decreased.
Taurus is already working
Tim Hayes of Ned Davis Research Inc., who timed last year’s bear market, says a bull market is already underway in US stocks.
“The market reacted to signs that lower inflation will allow the Fed to end its tightening policy,” said Hayes, the firm’s chief strategist for global investments.
But not everyone sees it that way. In fact, there are many bears walking around here. Investors pulled money from U.S. equity funds and exchange-traded funds in 11 of the first 15 weeks of the year, data from EPFR Global shows, despite a strong first quarter for the S&P 500 in four years.
For strategists at Goldman Sachs Group Inc., the exits show a “lack of sponsorship” for the health of stocks and highlight the disconnect between cash flows and performance this year, which could ” return”. The bank’s model, which accounts for a variety of flow data, suggests the S&P 500 should be about 6% below current levels.
So far, the surprising strength of the consumer has strengthened the arguments of the bulls. But household spending appears to be slowing amid high inflation and steeper borrowing costs.
For stocks, the key question may not even be whether a recession is coming in 2023 – how long will it last? Shorter recessions have led to faster recoveries, according to BI. Fed advisers, for their part, are predicting a “mild recession” later this year.
So far, bank earnings results have reassured investors about the health of the financial system. That helped ease worries about a projected 8% year-over-year decline in S&P 500 earnings, which would be its worst performance since 2020.
Sam Stovall, chief investment strategist at CFRA, maintains his optimistic call for US stocks, although he expects a mild recession could still occur. Its 12-month target of 4,575 for the S&P 500 is nearly 11% higher than Friday’s close.
“The real question is whether the market is already pricing in a mild recession,” Stovall said. “Many people are expecting a tsunami of disappointing guidance. But if that is already factored into share prices, the only way to be surprised from here is to bring it up.”
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