Have We Reached a Bear Market Bottom?
By Megan Horneman. © Verdence Capital Advisors
- Technical indicators looking bullish.
- Too many bears in the market.
- S&P 500 breaks through and sustains move through 50-day moving average.
- Fundamentals are biggest risk to the market.
- Prolonged yield curve inverted pointing to bearish economic outlook.
It has been a tumultuous year for investors, especially those that have relied solely on a 60% equity/40% fixed income portfolio for diversification. The S&P 500 posted its worst first half of a year since 1970 in 1H22 while the Bloomberg Barclays Aggregate Index posted its worst half of a year in history. This brings the obvious question from investors; have we reached the bear market bottom? In this weekly, we looked at some technical and fundamental indicators to get an idea of where we stand in the bear market.
Technicals paint mixed picture: Technicals can shift quickly so we watch them but believe fundamentals and valuations hold more value when choosing investments. The S&P 500 just crossed above its 50-day moving average for the first time since April last week. However, there are only ~55% of stocks in the S&P 500 Index that are above their 50-day moving average. According to Strategas research, history suggests that percentage needs to be closer to 80% or more to suggest an “all clear.”
From a contrarian perspective, there is indication that we may have reached peak pessimism. According to the American Association of Individual Investors Survey the ratio of bearish to bullish sentiment has exceeded past bear market bottoms. In addition, according to the BofA Fund Manager Survey, not only are those managers surveyed holding the most cash since October 2001 but those managers taking more risk than normal is now lower than during the Great Financial Crisis. A contrarian would suggest that peak pessimism has been seen in these indicators.
Fundamentals still cloudy: This week is a major week for us to gain a little more clarity around fundamentals from an economic and earnings standpoint. This week the bulk of the S&P 500 companies report 2Q22 earnings (including Apple, Microsoft, and Google), the Fed meets, and we will receive the first reading on 2Q22 GDP which will either confirm a recession or show moderate economic strength.
From an earnings perspective, we think earnings revisions have not come down enough for the next 12 months. This is despite a deteriorating economic environment and more hawkish Fed than what was anticipated three months ago.
The Bottom Line: One thing we know for certain is that timing the bottom of a bear market is impossible. While several capitulation indicators suggest the worst is behind us, we are cautious that we will see another leg lower as potential earnings growth becomes more realistic. Especially into those areas that may have already priced in peak pessimism and have already seen earnings estimates adjust accordingly.
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