Gavekal’s Charles Gave recalls the 1970s bear market, which occurred just as he began his finance career. He sees high probability we are now in the early stages of a similar period. Few now recall that era, so Gave shares three important lessons he learned.

Key Points:

  • Between February 1971 and the end of 1974, the S&P 500 to gold ratio fell from 102 to 14. No one could really explain why.
  • According to Warren Buffett, a bear market is the process through which capital returns to its legitimate owner. Doing so in this case will require both time and heavy price movements.
  • Initially in such periods, no one understands why the market is falling.
  • Gave’s best guess is the next Bear Marketwill arise from a collapse in both European bonds and social democracies, leading to a drop in middle class consumption.
  • By the end of a great bear market, no one is asking “are we there yet?” because those who did would have already been fired.

Charles Gave notes over-indebtedness is always the root cause of great bear markets. If so, today’s giant debt loads – government, corporate and household – suggest the next bear market will be a big one.

 

US Economy

 

  • The jobs market held up better than expected in May
  • The retail sector registered some job losses.
  • Prime-age labor force participation continues to rebound, which should ease wage pressures (as more Americans return to work).
  • One area of concern in the jobs report was an uptick in part-time employment for “economic reasons.”
  • Wage growth appears to be slowing (helped by stronger labor force participation)
  • Overall, the labor market looks stronger than it was prior to the pandemic.
  • But hiring is likely to slow in the months ahead amid increased focus on cost-cutting.

 

 

  • The market increasingly expects a 50 bps rate hike in September. The “pause” talk has died down for now.
  • Here is the business activity index.

 

 

  • Backlog of orders:

 

 

  • A separate service-sector PMI report from S&P Global showed accelerating input costs (likely driven by energy prices).
  • Retail gasoline prices are headed higher, which will keep pressuring consumer sentiment.
  • Equity futures traders are betting on deterioration in economic activity (and earnings).

 

 

  • The hit to household wealth could become a drag on consumption.
  • Danske Bank expects a recession in the US next year,

 

 

  • as inflation takes a toll on spending.

 

 

  • Are earnings estimates too optimistic?

 

 

  • Housing demand continues to ease.
  • A higher percentage of sellers have been dropping prices.
  • Economic growth is expected to slow substantially.

 

 

  • Will we see a recession?

 

 

  • US consumer credit growth topped forecasts again.
  • Household balance sheets remain relatively healthy.
  • And household cash levels are holding above pre-pandemic levels.
  • Atlanta Fed’s GDP tracker is holding below 1% for Q2 GDP.
  • Retail gasoline prices continue to surge, …

 

  • ……depressing consumer confidence.

 

 

  • Mortgage applications dipped to 2013 levels over the Memorial Day week.

Here is MBA’s seasonally-adjusted data. Their adjustment tends to be noisy, especially around US holidays.

 

  • This has been the fastest decline in housing affordability in decades

 

 

  • CoreLogic expects home price appreciation to cool but hold in positive territory.
  • Housing investment is expected to deteriorate.
  • What percentage of apartment renters are moving out to buy a home?

 

 

  • US commercial property sales are now down relative to last year.
  • And property prices are cooling as well.
  • Market expectations for the fed funds rate by the end of the year are nearing 3%. Some analysts expect the US central bank to keep delivering 50 bps hikes at every meeting until there is visible progress on inflation.
  • Wider federal budget deficits are expected next year and beyond.

 

Market Data

 

  • What were the drivers of this year’s selloff.

 

 

  • Deteriorating CEO confidence points to downside risks for earnings growth.

 

 

  • we have some performance data from last week.
  • Sectors:

 

 

  • Share of the top 100 global tech firms’ market capitalization:

 

 

  • Small caps have been outperforming in recent days.
  • According to the FT, “around 16% of US stocks are held by index trackers and ETFs vs. 14% by actively managed funds.”
  • Fund fees continue to shrink.
  • The S&P 500 is stuck in a range as investors await the CPI report.

 

 

Quote of the Week

 

“Strive for progress, not perfection”

 

Picture of the Week

 

 

 

All content is the opinion of Brian J. Decker