Steep recovery in equities post-CPI/FOMC minutes sell-off shows "bears are trapped." S&P 500 has never made new lows when it recovers above 200-week moving average >15 weeks (this cycle 25 weeks and counting).

On the heels of the post-CPI/post-FOMC minutes equity sell-off Wednesday, the bearish narrative took a momentary victory dance (Fed Barkin said more to do and FOMC minutes showed staffers expect a recession). But by Thursday's close (4/13), post-soft PPI, equities pushed to one-month highs and put S&P 500 4,200 back into play near term.

  • The bearish thesis is largely anchored on the view a US hard landing is inevitable, following rapid Fed hikes, further solidified by the festering regional bank crisis. And this is why markets fell hard post-March FOMC minutes release which showed Fed staffers base case is now a "mild recession."
  • While not overlooking the hard-nosed analysis by Fed staffers, recall, this is the same team that seemingly made some forecast errors in late 2022 as their models were impacted by the Haver Analytics hack (did not update). Moreover, their conclusion of a mild recession is hardly revelatory given the widely held consensus belief in this and given the extreme cautiousness of even CEOs, who became cautious early 2022. The issue is this has become the most widely anticipated recession ever, which raises the question whether a "rolling recession" has already passed.
  • Relative to this bearish consensus view (the parade of negative commentary yesterday affirms this is the case), the upside case for stocks rests on these elements
  • First, inflation is falling faster than consensus expects. Foremost, the March CPI and PPI show that "higher for longer inflation" narrative is sort of dead. In fact, the primary reason core CPI has remained high is the "shelter" component (+8.1% YoY) while core CPI ex-shelter 3M SAAR is 2.6%, which is within Fed target of ~2%.
  • Penn State researchers developed an ACY Marginal Rent Index (link), which measures the real-time cost of rents, rather than BLS's lagged "shelter" measurement. Using this index, Core CPI MoM is currently NEGATIVE and 3M SAAR is -7% and -0.8% YoY. See the point? Using non-lagged measures of inflation and we can see the Fed might be doing too much monetary tightening. Looking at their white paper, this alternative measurement of rents looks far more useful (see below).
  • Second, Fed could thus be done raising rates sooner than many expect. FYI, one last hike is also bullish as this, by construct, means the Fed will soon tolerate easing financial conditions. This should drive lower bond (MOVE Index) and equity volatilities ($VIX). The MOVE has fallen sharply and at 119, backed way off 180 a few weeks ago. VIX now has a 17 handle (17.8). Can we name a bear market where the VIX was below 20 for a sustained period?
  • Third, equity market and even bond market, to an extent, are arguing the opposite of a recession. The S&P 500 has now spent >25 weeks above its 200 week moving average. Since 1950, there are zero instances of the S&P 500 making a new low once it has recovered above the 200-week mavg and spent at least 15 weeks there. In fact, once passing this milestone (>25 weeks), the 1M, 3M, 6M and 12M return have been positive every single instance (n=12).
  • By the way, we have written multiple times about why Oct 12, 2022 is the low for this cycle. And this view was strengthened by the "rule of 1st 5 days" which shows when stocks >1.4% in 1st 5 days, post a negative year, stocks gain double-digits every time with median gain 26%. And recall, since 1950, there is no instance of S&P 500 posting 2 consecutive quarterly gains in a bear market. S&P 500 posted gains in 4Q22 and 1Q23. This means we are 6 months into a bull market.
  • As for the festering bank crisis, it seems to be cooling. The most recent Fed Balance sheet (H.4 link) shows total borrowings by banks is down -$11.4b, including the newly created BTFP facility (-$7.2b). So public panic about banks is stabilizing and hopefully fading (MOVE index down below 125 is a good sign).
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