The first quarter of the year is in the books (chart below, YTD). Against an almost uniform bearish consensus, for the first half of the year at least, global growth generally surprised to the upside all quarter. Lower energy and oil prices probably played an important role in the improvement in business sentiment, along with a better reopening of China than had been expected. Against this macroeconomic backdrop, and a stock market expecting more pain, developed markets were up nearly 8% over the quarter.
Getting the market narrative right is much easier in retrospect. Looking at the 15mo chart of the S&P 500 Index above, you can see the point in October when the stock market began to question an H1-2023 recession that it had well discounted back in August and September. Then in January, better global growth mentioned above provided fuel for a further rally. Chart: a higher low (year-end), followed by a higher high (Feb 2) and Viola – a change in trend. That’s a good thing.
It appears that the first half-2023 recession, the one the stock market spent most of 2022 preparing for, is not going to materialize. Back to the chart: from January thru mid-October of last year the center line of the average price trendline was a 45-degree declining black diamond ski slope (technically called a bear market). Since October, the center line is flat, averaging 3950 on the S&P 500. A market that is flat lining is not messaging the beginning of a new bull market. That may evolve in the weeks ahead, but it is not today’s market message. According to Bloomberg – since the October low on the S&P 500 Index, 20 mega-cap names (AAPL, MSFT, …) have accounted for 100% of the gains of the index through March. It means 480 names are cumulatively flat. Again, not a bullish sign. Perhaps the stock market got ahead of itself, pricing in a recession that is late by its 2022 expectations.
The backdrop for our flat-lining market is a Fed that shows no signs of abandoning its mission to bring down seemingly sticky inflation. Even though the bank liquidity snafu last month, which alone will likely slow loan growth, the lifeblood of an economy, the Fed has remained resolute. We now have OPEC pushing energy prices back up and likely financing another year of Russian war expenses. Neither is good for global economic growth.
As a risk manager, I think the odds of a recession further out on the calendar and further out than the stock market typically discounts have been climbing, not receding. How does one invest in front of a likely recession? Slowly and carefully.
Be well,
Mike
Sources: Addepar, Bloomberg, JPMorgan Asset Management, Ned Davis Research
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