Weekly Update

The Market Bottoms Well Before the Economy Does

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Published October 21, 2022


These days, there is much talk about a coming recession. By the time the recession gets here, if it does, the stock market will have already suffered much of its decline and will be near its low point. The article below from an analyst at JP Morgan presents a historical perspective of the timing between recessions and stock market bottoms. One thing to notice in these charts: the market (S&P 500) turns up BEFORE GDP does. And GDP turns up BEFORE earnings do. In the current market case, it’s highly possible that the stock market will continue taking its cues mostly from the path of interest rates. Interest rates have shown perhaps the fastest, sharpest rise in history. Once rates stop going up, it wouldn’t be surprising to see stocks turn around. That will likely happen as earnings are just beginning to slide. We shall see. Meanwhile, let’s look at some history courtesy of JP Morgan:

“When bear markets occur and the investment mistakes of the prior cycle are revealed, bearish investment commentary tends to intensify. There is a confessional, self-flagellating quality to some of this research, as if its authors are trying to atone for having missed the signals and risks during the prior boom. I read around 1,500 pages of research each week and the most consistent message now is a litany of gloom on earnings, valuations, wage and price inflation, Central Bank policy normalization, housing, trade, energy, the surge in the US$, China COVID policy, etc. I am not saying that these things are not important, since of course they are. But for investors, there is a remarkable consistency to the patterns shown below: equities tend to bottom several months (at least) before the rest of the victims of a recession.

Let’s start with the Eisenhower recession, which is notable for the lack of monetary and fiscal stimulus deployed in what at the time was a pretty severe recession. Equities bottomed in December 1957, while earnings did not bottom until a year later. GDP and payrolls also didn’t start to improve until the middle of 1958. You will see the same pattern during the 1970’s stagflation, the 1980’s double dip recession, the S&L crisis of the 1990’s, the Global Financial Crisis and the COVID pandemic.

Eisenhower recession

Stagflation era of the 1970's

1980's double-dip recession

S&L crisis of the 1990's

Global financial crisis

Global COVID pandemic

The Dotcom collapse (shown below) is the outlier: the earnings decline preceded the equity market decline, there was barely a recession at all, and the mini-recession of 0.3% preceded the equity market bottom by more than a year.

As for the latest bear market, it appears at the bottom. I see no reason why this cycle will not end up looking like most of the other ones. If so, the bottom in equities will occur even as news on profits, GDP and payrolls continues to get worse. When will that be? We will be watching the ISM manufacturing survey very closely. It has a good track record of roughly coinciding with equity market bottoms, as shown in the table at the bottom of this blog.

Dot-com bubble recession

Negative real rate experiment implodes as inflation returns

Equity market vs ISM manufacturing bottom


Market Update

Stocks rallied Monday as strong earnings from Bank of America (BAC) combined with an easing of concerns about the UK’s economic plan to encourage investors. The S&P 500 added +2.4% to kick off the week. Good results from a host of companies Tuesday assuaged investor fears of a poor corporate earnings season. Defense contractor Lockheed-Martin (LMT), finance company Goldman Sachs (GS), and software provider Salesforce (CRM) all outperformed while the broad market added another +1.1%. After hours, earnings from Netflix (NFLX) and United Airlines (UAL) both delivered for investors. However, the Wednesday bump higher in stock indexes met selling later in the morning as interest rates did not respond to the stock market cheer. Indexes dipped -0.7% in Wednesday’s trade. Overnight, shares of Tesla (TSLA) were hit as the company’s outlook failed to impress. Stocks pulled back a bit more Thursday (-0.8%) with interest rates once again moving higher. On Friday, one Fed official commented that the central bank would soon begin debating when to ease future rate hikes. That was enough to get stock bulls rolling. A wide swath of companies shot higher as the broad market rallied +2.4%. However, long-term interest rates also zoomed upward hitting 4.4% while short-term rates slipped.

The bulls managed to keep indexes within a range this week with stocks recovering the prior week’s losses. The S&P 500 (SPY) added +4.66% while the Nasdaq 100 (QQQ) rose +5.66%. Smallcap stocks (IWM) lifted by +3.53%.

Warm wishes and until next week.