Bear narrative has another problem. S&P 500 two consecutive quarterly gains always happen at start of new bull market. 5 reasons gains continue in April.

Increasingly looks like “bears are trapped” praying for new lows

The first quarter of 2023 (1Q23) is coming to a close Friday (one trading day left) and despite a wrenching banking crisis, the S&P is up +5.5% and up +2.3% for the month of March. Many skeptics (anecdotally, the majority of our clients) are likely sniffing at these gains, as mere noise until the bear market re-asserts itself. But for reasons outlined below, we believe 1Q23 gains now solidifies that “bears are now trapped” — meaning, our analysis suggests that the “lows are in” (10/12/22) and these gains continue in April:

• The banking crisis is looking more like “clean up in aisle 7” (Mr Mom, 1983) than a full blown crisis. Granted, regional bank are languihsing, but the crisis is not widening to a broader loss of confidence in the banking system. This started with a “social-media” generated bank run and those runs have not continued.
• Second, the Fed made a “dovish hike” in March and we expect incoming inflation data to support a further pause (softer inflation). Notably, consumer inflation expectations now stand far below reported CPI — U Mich mid-March +3.8% vs Feb CPI +6% YoY. This is the largest negative spread (-220bp) since late-1982. This gives argument for Fed to “tolerate” CPI reports as consumers see far less inflation. U Mich March final is released 3/31.
• Third, S&P 500 has now posted two consecutive quarters of gains:
  – 4Q22 +7.1%
  – 1Q23 +5.5%
  – over past 50 years, two consecutive quarters never seen in a “bear market”
  – in GFC (2007-09) nor “dot-com” (00-03) nor Volcker bear (81-82) etc
• Barring a big sell-off Friday (worse than -5.5%), two consecutive quarters of gains validate the start of a new bull market. This only solidifies our view that 10/12/22 was the bear market low and we are 6 months into a bull market.
• Fourth, seasonals favor April gains. We have used the “rule of 1st 5 days” as a guide for 2023. This rule (1st 5 days >1.4% plus neg prior year) implied +2.6% gains for March and March 2023 tracking +2.1%, so very close. This same analysis suggests April +4.2%, or >S&P 500 4,200. This would put YTD gains at ~10%.
• Fifth, investor positioning points to gains in April. CFTC data shows speculators are still short 202k contracts, pinning the bearish positioning in place since October 2022. Notably, some bears are beginning to exit the “trap” — Michael Burry @michaeljburry yesterday tweeted “I was wrong to say sell” (which he did in January 2023).

Bottom line: It is the bears who are trapped and could fuel further gains in April

In our view, it looks increasingly like the “bears are trapped.” What we mean by those bearishly inclined expect the S&P 500 to make new lows with a series of progressive arguments:

• Fed hike to break something
• Inverted yield curve to drive recession
• Bank crisis to guarantee decline in earnings
• Those on sidelines worry adding risk now adds “career risk” if stocks falter (bad timing)

So if our above analysis is correct, this would fuel a sharper upside move. The key, in our view, is there has never been a “secular bear market” where the S&P 500 posted 2 consecutive quarterly gains.

As @carlquintanilla notes, veteran bank research analysts like Michael Mayo do not see Big banks (G-SIBS) raising capital, meaning, this bank crisis is largely a regional bank crisis issue. This crisis still festers, but if limited, limits the risk of a recession.

START OF BULL: two consecutive quarters of gains

The bear narrative has another problem. As shown below, in each of the 3 major precedent bear markets since 1980, the end was validated by two consecutive quarterly gains.

• 4Q22 and 1Q23 are positive

INFLATION: Consumers see less inflation than “official data” — CPI might be wrong

For most of the last 30 years, consumers consistently viewed inflation as higher than official CPI data:

• the average spread was >100bp, meaning consumers saw inflation 1pp above CPI
• but this has reversed recently as consumers see 3.8% inflation (U Mich) while CPI still posts +6%
• as shown below, this is largest spread since 1982
• the takeaway is the CPI may not be the best way for Fed to judge inflation, particularly if consumers see it lower
• and thus, Fed can tolerate slower progress on inflation

APRIL GAINS: Rule of 1st 5 days sees April gains +4%

We have used the “rule of 1st 5 days” as a guide for 2023. We are using the 7 precedent years (since 1950) where S&P 500 gains >1.4% in 1st 5 days plus was negative the prior year:

• these 7 years imply S&P 500 gain of +26% for 2023, or ~4,750, consistent with our YE target
• this analysis correctly argued for softness in Feb (see below)
• called for March gains of ~2.6% which March 2023 is tracking
• and April 2023 should see stronger gains ~4%
• this would push S&P 500 to >4,200

SENTIMENT + POSITIONING: Still bearish

As this Bloomberg article notes, investors are bearishly positioned, which would fuel potential rally in April. And given the “bear trap” set up noted above, we think this could be fuel for a sharper than expected rally.

• the key is whether inflation is falling faster than expected
• we think U Mich inflation survey (3/31 for March final) and Feb PCE will provide some clues (3/31)

And as shown below, investor positioning remains stubbornly bearish when looking at CFTC futures positioning.

ECONOMIC CALENDAR: U Mich today most important in our view

There are some key inflation data points this week:

• most notably PCE deflation for Feb (its late)
• U Mich 1-yr inflation March final (more important)

Key incoming data starting March 19

• 3/7 10 am ET Powell testifies SenateHawkish
• 3/8 10am ET Powell testifies House Neutral
• 3/8 10am ET JOLTS Job Openings (Jan)Semi-strong
• 3/8 2pm ET Fed releases Beige Book Soft
• 3/10 8:30am ET Feb employment report Soft
• 3/13 Feb NY Fed survey inflation exp. Soft
• 3/14 6am ET NFIB Feb small biz survey Soft

• 3/14 8:30am ET CPI Feb Tame
• 3/15 8:30am ET PPI Feb Tame
• 3/17 10am ET U. Mich. March prelim 1-yr inflation BIG DROP
• 3/22 2pm ET March FOMC rate decision DOVISH
• 3/31 8:30am ET Core PCE deflator Feb
• 3/31 10am ET U Mich. March final 1-yr inflation

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