Stocks fell this morning after opening higher on the day. The Dow, S&P, and Nasdaq Composite all tumbled in response to poorly received economic data. The 10-year Treasury yield advanced to a daily high of 3.25%, too, putting additional pressure on equities.
The June consumer confidence index (released this morning) dropped to 98.7, initially prodding stocks upward as recession odds climbed. Surging inflation expectations, however, ultimately drove the market lower. June’s 12-month inflation expectation clocked in at 8%, matching a high unseen since August 1987.
Don’t forget that poor economic data is a bullish impulse these days. It suggests that a recession will soon arrive, which investors believe will force the Fed to halt its rate hikes before cutting rates again, kicking off another round of quantitative easing (QE).
Evidence of high inflation (via “hot” Consumer Price Index releases) or the anticipation of high inflation, on the other hand, are both still bearish because the Fed is unlikely to stop raising rates if inflation remains elevated.
Analysts were quick to call off the bear market rally as a result of the newly released data.
“One of the trickier calls in this business is evaluating the difference between a bounce in a bear market vs. the start of a more durable advance,” wrote Strategas technical analyst Chris Verrone.
“The current bounce, +8% over the last 4 trading days, has been impressive on the surface as most moves of this context tend to be, but again has yet to signal any resounding internal or leadership improvement.”
With earnings season approaching, many analysts have warned clients that investors may not like what they hear.
“I think we’re going to have a second half that’s frustrating the bulls and frustrating the bears, bouncing around a bunch as we kind of digest the economy slowing,” explained Bob Doll, Crossmark Global Investments chief investment officer.
“How much of an effect does that have on earnings? Maybe we get a little better inflation news so the [price-earnings ratio of the S&P 500] doesn’t get threatened as much. But we’re moving from a period where it’s all been about PEs multiples declining. And we’re moving to a period where I think the earnings are going to be watched more carefully than the PE.”
That begs the question of whether stocks will finally bottom out if the current rally fails.
CFRA Research chief investment strategist Sam Stovall told clients he thinks we’ll reach the yearly low in a matter of months.
“Historically, the third quarter has been the most volatile and only the second average decliner (along with the second quarter) in the 16-quarter presidential cycle,” Stovall said in a morning note. “This year, despite a likely near-term relief rally, stocks should again feel pressure from an expected slowdown in economic activity, resulting in a reduction in EPS (earnings per share) growth projections.”
Stovall falls into the same line of thinking as most Wall Street analysts; slowed economic activity will press stocks lower. That’s not really the case, though. Data indicative of an economic slowdown has been the only thing worth celebrating over the last few weeks. Bulls want a recession to get here fast so the Fed can start cutting rates sooner rather than later.
Rising recession odds sparked the S&P’s recent rally alongside generally oversold conditions. For that reason, the bear market rally could absolutely continue on from here despite this morning’s major intraday reversal, which is likely nothing more than a response to the market’s sudden burst higher that made most stocks appear overbought in the very short term.