Investors rush toward stocks geared to a recession as market remains stuck in 9-month range

Published Sat, Apr 16 20228:11 AM EDTUpdated Sat, Apr 16 20228:13 AM EDT

After "It's different this time," the four most treacherous words in investing might be, "It's already priced in." There's never an identifiable moment when the probable tomorrow has been precisely incorporated into today's prices. Still, it's fair to observe the various ways that markets have taken account of the many known hazards of a vexing backdrop and have been revaluing assets accordingly. Which means, at the very least, that they are less likely to be blindsided if reality tacks toward the negative end of a particularly wide range of possible economic outcomes. The S & P 500 , down nearly 9% from its Jan. 3 peak, has spent just about all of the past three months below the minus-5% threshold and finished last week at a level first reached nearly nine months ago. This qualifies as a fairly prolonged consolidation as the market and economy entered some version of late-cycle status and the Federal Reserve prepared the Street for a hurried tightening plan. While the magnitude of the maximum correction — near 13% — is perfectly routine, the payback demanded of the average stock has been steep. In the S & P 500, the average drop from 52-week high to its latest low is 25%; among Nasdaq Composite members it's 45%. The S & P has made only brief, halting stabs below the initial Jan. 24 intraday low near 4200. That was before the Russia invasion of Ukraine, the spike in crude oil above $125 and the past three eye-watering monthly inflation reports, all of them qualifying as a new four-decade high. Speaking of inflation, last week both the consumer and producer price indexes were hotter than forecast at the headline level, with just the hint of softness in crucial core CPI categories. And Treasury yields were mostly unfazed. The two-year yield slipped back enough to imply almost one fewer expected quarter-point Fed rate hikes this year. One doesn't need to have high conviction that "peak inflation" has past to acknowledge that investors aren't so easily sticker-shocked by what were once unthinkably aggressive and broad price increases. Run in defensive stocks The accompanying threat of an economic slowdown complicates the picture, for sure, though here again it hardly seems news to the market. Ned Davis Research tracks a SHUT Index — a proxy for defensive sectors compose of staples, healthcare, utilities and telecom — which has broken out to a new high. Bespoke Investment Group notes that more than 90% of all stocks making 52-week highs last week were from the consumer staples, healthcare, real estate and utilities sectors. The semiconductor, bank and transportation groups — three key cyclical bellwethers and risk-appetite barometers — look like the same chart over the past year, down around 5%, lagging the S & P 500 by double-digits, offering a downbeat story of a downshifting economy. The rush toward stocks geared to tougher times and away from boomtime plays can also be seen in the near-50-percentage-point outperformance so far this year of Walmart shares over Home Depot . The public's fixation on risk rather than reward is now stark, at least based on last week's American Association of Individual Investors sentiment survey, which got much attention for the lowest percentage of bullish respondents since 1992 – fewer than 16% said they expect stocks to rise over the next six months. While this could be a bit of a fluky data point – this is not the most scientific poll and most other mood gauges are not as pessimistic – similar results through history have had positive implications for forward equity returns over coming months, if less so in the immediate aftermath. All of this supports the idea that the big, known obstacles ahead of the market and economy are seen by all and already have investors riding the brake. To be clear, this is not the same as arguing that all the potential dangers are reflected in the price. Clichés became clichés for a reason, of course, and two of the oldest are "Don't fight the Fed" and "Don't fight the tape." The Fed, as established, is in a hurry to move short-term rates a good distance from zero as soon and as it can. And while stocks have tended to do fairly well at the start of tightening campaigns — and even for a time after short- and long-term Treasury yields invert, as some recently did — "fast" tightening cycles have been tougher on stocks than slower ones. This will likely keep risk appetites in check, but this has been the situation for most of this year. Recession priced in? The tape is mixed at best, with the noted defensive leadership, range-trapped churn, multiple moves above and below the S & P 500's 200-day average and fewer than half of all S & P stocks above their own 200-day average. This shows a lack of broad momentum and severe offsetting currents holding the indexes in check. Then there's the fact that this measure never plunged below 20% as in 2020, late 2018 and even the 2015-'16 correction that the current phase somewhat resembles, which can be read as resilience or an incomplete purge. In the current moment, the best that might be said of the market is that it has refused to break down decisively, holding to a plausible but far from certain bottoming setup. It's probably a net positive, too, that the equal-weighted S & P 500 is down less than 6% from its peak, three percentage points better than the standard market-cap-weighted S & P's near-9% drop. The huge Nasdaq stocks atop the index have been an outsized drag, just as they'd been a disproportionate driver of upside into late 2021. The main project of the markets this year has been to compress rich valuations as the economic cycle matures and the Fed contributes to a rise in the cost of capital. The Nasdaq 100 has now given back the valuation premium it had built up during the pandemic, but has not cheapened beyond that. JPMorgan shares are now below where they were two years ago and mid-cap stocks as a group are cheaper than they've been in more than three years. None of this means for sure that markets have fully priced in what difficulties might await. But it shows there's now broad recognition of a narrower path to a happy economic outcome ahead — and any fresh evidence pushing against the case for an imminent recession might find the market mis-positioned for such an upbeat turn.

Traders on the floor of the NYSE, April 14, 2022.

Source: NYSE

After "It's different this time," the four most treacherous words in investing might be, "It's already priced in."

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Investors rush toward stocks geared to a recession as market remains stuck in 9-month range

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