Just like bull markets breed excesses and complacency, bear markets do the same but in a different way. While it’s an open question of whether or not the S&P 500 (SPY) is in a bear market, there’s no doubt that certain parts of the market have been in a bear market since early last year. So, we are seeing signs of excesses like high short interest and underinvestment in stocks and certain sectors. Think of it like dry tinder that has built up and could explode under the right circumstances. In today’s commentary, I want to talk about this unique circumstance and the recent market action, then I want to add some follow-on thoughts from last week’s recession discussion. Read on below to find out more….
(Please enjoy this updated version of my weekly commentary published June 2nd, 2022 from the POWR Stocks Under $10 newsletter).
First, let’s review the past week…
Over the past week, the S&P 500 is up by 3%, and we seem to be continuing higher following last week’s bounce. In total, the market is now up by 9.6% from the May 20 lows.
Gains are well-represented across the board which increases my confidence that the bullish side is correct. We are seeing big bounces in the most oversold growth stocks, while other parts of the market are making new highs.
Another positive was Microsoft finishing in the green despite cutting its earnings forecast.
As noted in the intro, I’m of 2 minds here. In a greater sense, I do acknowledge that the market environment for much of the past year has been unfriendly, and fading such quick gains has been the correct decision for much of the past year.
So, I’m aware of this possibility, and I do intend to trim exposure as we move higher.
But, I do think that it’s possible that this move higher could persist given the extremes reached in sentiment around all sorts of issues.
This includes the number of investors and people looking for a recession or inflation next year. Fund managers have very low allocations to stocks and technology, while they have high allocations of cash and short positions.
This is exactly when we tend to get these V-shaped, short-squeeze-type rallies that frustrate both bulls and bears. The bears are short and feeling pain, while many bulls are underinvested and uncomfortably watching the market move higher.
More Recession Thoughts
In last week’s commentary, I laid out a rough roadmap to try to make sense of the economy and particularly the recession issue.
We certainly have weakness in tech and the goods part of the economy. But, this weakness is on a YoY basis. On a 2Y basis, growth is exceptional in these areas
Even if we do get weakness and a contraction in these categories, there will continue to be strength in categories like autos, CAPEX, housing, defense, and energy.
And, the strength in these areas is due to issues that transcend the economic cycle like demographics, the re-shoring of supply chains, geopolitics, etc.
Therefore, this is not going to be a normal recession when most parts of the economy are simultaneously contracting.
But, I do think it could be a situation where the economic pain is not as bad as the stock market pain since tech and the goods part of the economy make up a large portion of stock market capitalization. Another way to say this is “soft landing’.
And, I think the odds of this more benign outcome will increase in the coming weeks especially if China’s economy comes back online. This would essentially be a growth impulse while being deflationary at the same time.
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SPY shares . Year-to-date, SPY has declined -11.85%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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