Maybe the stock market has put in a 'DaVinci Code' bottom, Ed Yardeni says

Published Tue, Jul 19 20226:33 AM EDT

Maybe, just maybe, the stock market has already put in its "DaVinci Code" bottom. That's what Wall Street veteran Ed Yardeni is calling the possibility that the June 16 closing low of 3666 in the S & P 500 will also prove the bear market bottom, echoing the scarily similar 666 low that the stock market reached in March 2009 during the worst of the Global Financial Crisis. "Is that a freaky DaVinci Code coincidence or what?," Yardeni asked Monday in a note to clients of Yardeni Research. To be sure, in the month since then, stocks climbed 5.4% through last Friday and "that gain could certainly reflect just a short-covering rally in a bear market rather than the beginning of a new bull market." But count Yardeni among the bulls. Believers in "the new bull market" figure that the stock market sold off in the first half to reflect ample bad news, while arguing that the second half economic outlook for 2022 will be no worse than the first, and that "2023 is likely to be brighter" still. What's more, valuations have improved. The forward price-to-earnings ratio got as low as 15.3 in mid-June and recently returned to 16.1. The S & P Midcap 400 forward P/E was only 11.6 at the end of last week, while the S & P Smallcap 600 stood at only 11.4. Yardeni sums it up by relying on five specific reasons for his optimism. First off, the bull case relies on inflation rates coming down in the second half accompanied by only a modest slowdown in economic growth. Yardeni takes comfort in a handful of "core" inflation measures, the 20% decline in commodity prices since early June and signs that supply chain disruptions are easing. Secondly, "Fed tightening will be over soon," Yardeni wrote of the bull case, discounting a pair of three-quarter point increases in the fed funds rate in July and September, bringing the benchmark rate to 3.00%-3.25%. Shrinking the size of the Fed balance sheet through a sale of assets known as "quantitative tightening" will equal at least another half- to full-point increase in the funds rate. Third, the bull case rests on a view that what's happening now in terms of sluggish economic growth equates to nothing more than a "mid-cycle slowdown," comparable to those seen in the mid-1980s, mid-1990s and mid-2010s. Friday's June retail sales and industrial production reports bore out this idea which, if it becomes the prevailing street view, " would increase the odds that the bear market bottom occurred on June 16." Fourth, unstable geopolitics and insecure food and energy supplies around the globe will continue to stir investors to put money into U.S. capital markets in a process that Yardeni calls "TINAC" (There Is No Alternative Country). Lastly, Yardeni said there are just "too many bears" who have already capitulated. In the past, "such negative sentiment set the stage for sharp rebounds during the ensuing bull markets." Although maybe not as far back as the DaVinci Code.