No one rings a bell at the top or bottom of a market or economic cycle. We have countless indicators, data points, models and opinions that tell us when and where the exact ups and downs will occur, but none are perfect. It is clearly more of an art than a science. That’s why I think it’s important to never be all-in or all-out of the market. Instead, it makes more sense to increase or decrease exposure from a certain percentage, and everyone has a different goal based on their respective objectives and tolerance for risk. I try to vary my exposure based on the rates of change I see in all the measures of economic and market health that we have at our disposal.
While it is important to consider absolute numbers, I think the percentages of change in those numbers are much more important. An absolute number can be misleading, especially if it is a lagging indicator. For example, it sounds like a terrible time to invest new money when the unemployment rate is at 10%, but when the rate fell from a peak of 10%, like in October 2009, it was an excellent time to put new money into venture assets . Economic data was far from good for some time after that, but rates of change were positive, driving up risk asset prices.
Along the same lines, the inflation rate is as lagging an indicator as the unemployment rate. No one was sure that the Consumer Price Index had peaked at 9.1% in June last year, but the market’s reaction came at just the right time. A month before the Bureau of Labor Statistics reported that figure in mid-July, the more domestically focused Russell 2000 index of small-cap stocks bottomed out in the bear market, timed almost perfectly with the peak of inflation in mid-June. It rose more than 20% from that low and remains about 16% above that low, while the 50-day moving average is on the verge of a bullish cross with the 200-day moving average. This is a very positive development for the broad stock market.
This index tells me that the macroeconomic landscape is getting less bad from terrible conditions. It doesn’t mean things are great, but they don’t have to be great for the markets to perform.
The bear camp will point to the underperformance of the S&P 500 as it struggles with its 200-day moving average and the 4,000 level but I think investors will appreciate the huge clout that half a dozen megacap technology-related names still have over this index. Remove those names and the index looks even stronger than the Russell 2000.
The equal-weighted version of the S&P 500 (RSP) has risen well above its 200-day moving average to challenge the November highs with the added benefit of a bullish cross, which occurs when the 50-day moving average crosses above 200. day. This reverses last March’s bearish cross. This tells me that the average stock in the S&P 500 is far outperforming the index.
I think these bullish market developments tell us that we will continue to see inflation decelerating at an accelerating pace as the economy continues to grow. That would provide a soft landing and avert the recession the bears are counting on for new lows in major market indices. Admittedly, there are still several worrying economic indicators pointing to tough times ahead, especially for the housing and manufacturing sectors, but strong consumer spending appears to be strong enough to keep the economy as a whole on a growth path that should last another year. should support very modest earnings growth.