Wall Street's sleuth of bears is growing 🧸🧸🧸
Plus a charted review of the macro crosscurrents 🔀
Stocks kicked off the new year on a positive note, with the S&P 500 climbing 1.4% last week. The index is now up 8.9% from its October 12 closing low of 3,577.03 and down 18.8% from its January 3, 2022 closing high of 4,796.56.
Meanwhile, the market’s many bears got more company.
Michael Kantrowitz, the chief investment strategist at Piper Sandler, expects the S&P 500 to tumble to 3,225 by year end, Bloomberg reported on Wednesday. This call makes him the most bearish of Wall Street’s top stock market forecasters.
Byron Wien, the legendary former chief investment strategist at Morgan Stanley and current vice chairman at Blackstone, warned on Wednesday that financial markets could slide during the first half of the year before rallying again.
“Despite Fed tightening, the market reaches a bottom by mid-year and begins a recovery comparable to 2009,“ Wien wrote.
Will the bears be proven right this year? Maybe.
But the fact that so much of Wall Street is bearish may actually produce the opposite result.
“Wall Street is bearish,” Savita Subramanian, head of U.S. equity strategy at BofA, wrote on Wednesday. “This is bullish.“
Subramanian was referring to the contrarian signal from BofA’s proprietary “Sell Side Indicator,” which tracks average recommended allocation to stocks by U.S. sell-side strategists. While it doesn’t currently reflect “extreme bearishness,” it’s at a level that “suggests an expected price return of +16% over the next 12 months (~4400 for the S&P 500).”
Subramanian’s official target for the S&P 500 is 4,000, which is on the bearish end of Wall Street. Though she has warned against being out of the market at a time when the consensus expects lower prices.
Going into 2022, Wall Street was caught wrong-footed by being too bullish ahead of what became a historic bear market.
Will the consensus be right this time with their bearishness?
We do however know that the stock market goes up in most years.
And longer term investors should remember the odds of generating a positive return improves for those who can put in the time.
Related from TKer:
Everyone’s talking about a near-term sell-off. A contrarian signal? 🤔
One of the most frequently cited risks to stocks in 2023 is 'overstated' 😑
Don't expect average returns in the stock market this year 📊
Reviewing the macro crosscurrents 🔀
There were a few notable data points from last week to consider:
🚨 Job growth. According to BLS data released Friday, U.S. employers added 223,000 jobs in December, stronger than the 203,000 gain economists expected. Over the course of 2022, employers added a whopping 4.5 million jobs.
Almost all major industry categories reported gains. The information sector, which includes the tech industry, saw job losses. For more context on these losses, read: “Don't be misled by no-context reports of big tech layoffs 🤨“
📉Unemployment rate tumbles. The unemployment rate fell to 3.5% (or 3.468% unrounded) from 3.6% in the prior month. This is the lowest rate since 1969.
💰 Wage growth cools. Average hourly earnings in December increased by 0.3% month-over-month, cooler than the 0.4% rate expected. On a year-over-year basis, average hourly earnings were up 4.6%, which was lower than the 5.0% expected. For more on why this matters, read: “A key chart to watch as the Fed tightens monetary policy 📊“
📈 Job switchers get better pay. According to ADP, which tracks private payrolls and employs a different methodology than the BLS, annual pay growth in December for people who changed jobs was up 15.2% from a year ago. For those who stayed at their job, pay growth was 7.3%.
👍 There are lots of job openings. According to BLS data released Wednesday, U.S. employers had 10.46 million job openings listed in November, down modestly from 10.51 million openings in October. While openings are below the record high of 11.85 million in March, they remain well above pre-pandemic levels.
During the period, there were 6.01 million people unemployed. That means there were 1.74 job openings per unemployed person in November. This is down from 1.99 in March, but it still suggests there are lots of opportunities out there for job seekers.
👍 Layoff activity is low. The layoff rate (i.e., layoffs as a percentage of total employment) stood at 0.9% in November, unchanged from its October level. It was the 21st straight month the rate was below its pre-pandemic lows.
💼 Unemployment claims remain low. Initial claims for unemployment benefits fell to a three-month low of 204,000 during the week ending Dec. 31, down from 223,000 the week prior. While the number is up from its six-decade low of 166,000 in March, it remains near levels seen during periods of economic expansion.
🛠 Manufacturing cools. The ISM’s Manufacturing PMI fell to 48.4 in December from 49.0 in November. A reading below 50 signals contraction in the sector.
📉 Services cool. The ISM’s Services PMI fell to 49.6 in December from 56.5 in November. A reading below 50 signals contraction in the sector.
📉 Surveys say prices are cooling. ISM Manufacturing PMI Prices Index fell deeper into contraction.
The ISM Services PMI Prices Index suggests prices are still rising, but at a decelerating rate.
⛓️ “Supply chains are back to normal.” From Apollo Global’s chief economist Torsten Slok: “Supply chains are back to normal, and the price of transporting a 40-feet container from China to the US West Coast has declined from $20,000 in September 2021 to $1,382 today, see chart below. This normalization in transportation costs is a significant drag on goods inflation over the coming months.“
The New York Fed’s Global Supply Chain Pressure Index — a composite of various supply chain indicators — declined slightly in December and is hovering at levels seen in late 2020. From the NY Fed: “Global supply chain pressures decreased moderately in December, disrupting the upward trend seen over the previous two months. The largest contributing factors to supply chain pressures were rises in Korean delivery times and Taiwanese inventories, but these were more than offset by smaller negative contributions over a larger set of factors.“
📉 Rents are down. From Apartment List: “We estimate that the national median rent fell by 0.8 percent month-over-month in December. This is the fourth consecutive monthly decline, and the third largest monthly decline in the history of our estimates, which start in January 2017. The preceding two months (October and November 2022) are the only two months with sharper declines.“
➕ No more negative yielding debt. From Bloomberg: “The world’s pile of negative-yielding debt has vanished, as Japanese bonds finally joined global peers in offering zero or positive income. The global stock of bonds where investors received sub-zero yields peaked at $18.4 trillion in late 2020, according to Bloomberg’s Global Aggregate Index of the debt, when central banks worldwide were keeping rates at or below zero and buying bonds to ensure yields were repressed.“
Putting it all together 🤔
Inflation is cooling from peak levels. Nevertheless, inflation remains high and must cool by a lot more before anyone is comfortable with price levels. So we should expect the Federal Reserve to continue to tighten monetary policy, which means tighter financial conditions (e.g. higher interest rates, tighter lending standards, and lower stock valuations). All of this means the market beatings will continue and the risk the economy sinks into a recession will intensify.
But it’s important to remember that while recession risks are elevated, consumers are coming from a very strong financial position. Unemployed people are getting jobs. Those with jobs are getting raises. And many still have excess savings to tap into. Indeed, strong spending data confirms this financial resilience. So it’s too early to sound the alarm from a consumption perspective.
At this point, any downturn is unlikely to turn into economic calamity given that the financial health of consumers and businesses remains very strong.
As always, long-term investors should remember that recessions and bear markets are just part of the deal when you enter the stock market with the aim of generating long-term returns. While markets have had a terrible year, the long-run outlook for stocks remains positive.
For more on how the macro story is evolving, check out the previous TKer macro crosscurrents »
For more on why this is an unusually unfavorable environment for the stock market, read “The market beatings will continue until inflation improves 🥊“ »
For a closer look at where we are and how we got here, read “The complicated mess of the markets and economy, explained 🧩” »
TKer’s best insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How stocks performed when the yield curve inverted ⚠️
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
700+ reasons why S&P 500 index investing isn't very 'passive'💡
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks. From January 1995 through April 2022, 728 tickers have been added to the S&P 500, while 724 have been removed.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
When the Fed-sponsored market beatings could end 📈
At some point in the future, we’ll learn a new bull market in stocks has begun. Before we can get there, the Federal Reserve will likely have to take its foot off the neck of financial markets. If history is a guide, then the market should bottom weeks or months before we get that signal from the Fed.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
'Past performance is no guarantee of future results,' charted 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. According to their research, 29% of 791 large-cap equity funds that beat the S&P 500 in 2019. Of those funds, 75% beat the benchmark again in 2020. But only 9.1%, or 21 funds, were able to extend that outperformance streak into 2021.
One stat shows how hard it is to pick market-beating stocks 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 22% of the stocks in the S&P 500 outperformed the index itself from 2000 to 2020. Over that period, the S&P 500 gained 322%, while the median stock rose by just 63%.
Hey Sam 👋 big fan here
I do wanna take exception with this perception/characterization that "so much of Wall Street is bearish." S&P closed at 3,839.50 on Fri. Dec 30th. By my count 13 firms have a YE price target above that. Small number of WS firms have price targets below that. While I recognize many of these price targets were released in early December, they weren't pulled down after the latest Fed SEP (as the market was).
And do you not count as commentary? Do some of Fintwit's favorites (e.g. Michael Batnick, Ben Carlson, Derek Thompson, Michael Antonelli -- all in a Bullish / "no recession" camp) not count for commentary?
I've heard this refrain (repeated by Savita) that everyone's bearish. And it sounds like a pretext to question economic concerns & to rally a bullish sentiment. But it sure doesn't seem to me as if "everyone's bearish." Or not even *most* market participants/firms/commentators are bearish.
And I say this with great appreciation of your regular reminder that we should all be long-term optimists. That's true.
I just object to the characterization of this current milieu
Thank you for what you do! 🙏