Over the past five recessions since 1980, corporate earnings fell by an average of 25%.

Take a look…

 

 

The blue line is the earnings of the companies in the S&P 500 Index, shown on a logarithmic scale to make it easier to see the changes in past years. The gray areas on the chart are recessions, including the one I’m projecting.

As you can see, Wall Street’s earnings estimates are far too rosy.

Take a look at the next chart. It shows the S&P 500 Index – also on a logarithmic scale – over roughly the same period…

 

 

You can see the stock market never bottoms before recessions. It bottoms during or after recessions.

We’re not even in an official recession yet. Most are predicting it won’t start until later this year. That means the stock market bottom is still in front of us.

Excluding the brief bear markets following “Black Monday” in 1987 and the pandemic in 2020, the average length of the last four bear markets was 675 days. We’re only 479 days into the current bear market. The bear market of 2000 to 2002 lasted more than 900 days.

More important, the stock market fell an average of 45% during those bear markets, from peak to trough. So far, the market is only down 14% in this bear.

The chart below compares those bear markets with this one so far. As you can see, this bear has a long way to go…

 

 

Notice there are lots of “bear market rallies” in every bear market.

 

Sell in May and Go Away

 

An interesting Seasonality Timing System was developed by Yale Hirsh of the Stock Trader’s Almanac. It was based upon the observation that stock market seasonality is broken into two six-month periods. The favorable period begins on November 1 and ends on April 30. The unfavorable period begins on May 1 and ends on October 31. The rule is that you get fully invested in stocks on November 1, then switch to T-Bills on May 1. (“Sell in May and go away.”)

There are various reasons behind seasonality tendencies. For example, summer vacations cause investors to lose interest in the market, resulting in stock prices languishing. On the original DecisionPoint website, we had one-year charts analyzing seasonality all the way back to the 1920s, and I can tell you that the system works sometimes, and sometimes it doesn’t. That doesn’t mean that we shouldn’t have an awareness of the seasonality cycles, because there is clearly something there, and it has tended to work better in “modern times.”

Looking at the most recent one-year period, we can see that both the favorable and unfavorable periods delivered profits on a strictly mechanical basis, but the ride got pretty rough at times.

 

 

US Economy

 

  • The PMI indices from S&P Global point to a rebound in US business activity. The report further boosts the odds of a Fed rate hike in May.
  • Manufacturing is growing again (PMI > 0).

 

 

  • Hiring in the manufacturing sector has picked up.

 

 

  • Service sector activity accelerated this month.

 

 

  • Service firms have been doing more hiring.

 

 

  • Economists continue to boost their forecasts for the 2023 GDP growth.

 

 

  • At the same time, they are trimming growth expectations for 2024.

 

 

  • The Dallas Fed’s regional manufacturing index moved deeper into contraction territory this month.

 

 

  • Factories are once again reducing workers’ hours.

 

 

  • Fewer companies expect to be raising wages.

 

 

  • Very few firms expect an increase in capacity utilization.

 

 

  • Credit card delinquencies are rising.

 

 

  • Great news! – Inflationary pressures continue to ease.
  • Bankruptcies among small private firms have risen sharply.

 

 

  • The Conference Board’s consumer confidence index declined further this month, driven by weakening expectations (3rd panel). The index of current conditions edged higher (2nd panel).

 

 

  • The expectations index signals slower consumption ahead.

 

 

  • The current employment situation is keeping the Conference Board’s index from crashing.

 

 

  • The spread between the Conference Board’s expectations and present situation indices has hit its lowest level in over two decades, which is typically a precursor to a recession.

 

 

  • The 10-year/3-month Treasury spread is nearing -170 bps for the first time in decades.

 

 

  • Similar to the Conference Board’s spread, the NY Fed’s yield curve indicator signals a recession in the months ahead.

 

 

  • Affordability will remain a headwind for the housing market. Here are the relative changes in home prices and wages.

 

 

  • However, weaker mortgage applications signal trouble ahead.

 

 

  • Adjusted for inflation, capital goods orders continue to roll over, signaling a retreat in business investment.

 

 

  • The Richmond Fed’s manufacturing index shows an ongoing contraction in the Mid-Atlantic and Southeastern US factory activity.

 

 

  • The Philly Fed’s regional services index shows slowing activity.

 

 

  • The first-quarter GDP report fell short of expectations, as inventory reductions contributed to a slowdown in economic growth.

 

 

  • We are still on track for a 25 bps rate hike in May.
  • In March, pending home sales were 23% lower than the previous year’s levels, underperforming expectations.
  • Mortgage applications point to further weakness ahead.

 

 

  • The Kansas City Fed’s manufacturing index declined sharply this month as demand softened further.

 

 

Market Data

 

  • Market breadth has been weak. On average, only 30% of stocks have outperformed the S&P 500 over the past 20 days, the lowest reading since 1999.

 

 

  • The Treasury bill curve is highly distorted.

 

 

  • Here is the spread between the 3-month and the 1-month bills.

 

 

  • The decline in bonds versus stocks appears to be bottoming, which typically happens during shifts in the economic cycle.

 

 

  • The decline in US leading indicators points to lower earnings ahead.

 

 

  • The market remains anxious about US regional banks.

 

 

  • The Nasdaq Composite market breadth has deteriorated sharply.

 

 

Quote of the Week

 

“You have to live before you die, or else you’ll die before you live.” – Peter Sellers

 

Picture of the Week

 

The tax burden by state:

 

 

 

All content is the opinion of Brian Decker