Santoli: Strengthening case against a recession pushing S&P 500 to highest levels since early June

Published Wed, Aug 3 20221:41 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. There are too many solid counterpoints to the recession bear case to keep stocks from pushing the upper edge of their two-month range, even with Federal Reserve speakers declaring the tough-love party line on inflation-fighting — and bond yields and the dollar retaking some of their recent decline. The S & P 500 has bobbled back up to the Friday/Monday highs, still enjoying a tailwind from under-invested quant traders and a helpful decline in volatility, which expands hedge funds "risk budget" for equities. Aside from being near top of the post-April range and right at the 100-day moving average, this zone in the mid-4,100s on the S & P 500 also goes back to the intraday lows — then the YTD lows too — from the February Ukraine invasion sell-off. A healthy ISM Services index with a welcome drop in the prices-paid component joins Tuesday's temperate decline in job openings, which has so far come with relatively little measurable attrition in current employment. It's also broadly consistent with the vaunted "soft-ish" landing Fed Chair Jerome Powell has mentioned as the aspirational goal of this monetary tightening phase. There's plenty left to prove along this front, of course. Much PhD brain power has been deployed to argue whether suppressing job listings while sparing currently filled jobs is a plausible goal or a fantasy. The keep-it-simple conclusion seems to be that it's an expedient cover story for the Fed to stick to as they hustle rates to and beyond neutral — while trying not to seem as if it's intentionally trying to boost unemployment. Fed officials might believe it'll happen that way, but even if they didn't they'd probably stick to that story anyway. The debate over whether the mid-June market low will prove to be the decisive low for this bear phase is a fairly well-balanced one now. Technical studies cite the extreme positive breadth of stocks powering higher (number of 20-day highs, the turn in the broader advance-decline line, etc) as one point in favor of the low being consequential, though not every desired signal of a new bull-market advance was triggered. Not every market inflection point follows a script, this is a weight-of-the-evidence game. The bulls have some ammo, but we need to see how it's used. At both the May and June lows, several readings of washed-out technical and historically extreme underperformance of stocks lined up in a way that previously have led to very high chances the market would be higher over the subsequent 12 months. If that holds, it would suggest at minimum that likely downside by next spring would be somewhere above 3,650 for the S & P 500 at minimum, with average gains suggesting something better than that as upside potential. That in itself wouldn't mean stocks are set to rip higher, but it helps as a mental placeholder of probabilistically determined risk/reward. It must be said, the glaring exceptions to when markets did well a year after those oversold extremes were clustered in the multiyear bear markets of 2000-2003 and 2007-2009. The current rally is perfectly in line with some of the counter-trend relief bounces from those periods. The call for an investor is whether the same degree of macro/systemic stress and economic vulnerability is at work today. The 2000-2003 period seems to be the better match on some levels, but the equity market now started with less lofty extremes to work off. Today marks seven months since he S & P 500's record high. Trailing five- and 10-year annualized total returns for stocks now are 12.6% and 13.6% (still pretty good – long-term investors are doing fine here). In 2000, seven months after the peak, the comparable trailing gains over five and 10 years were 21.1% and 19.2%. While this cycle is pretty distinctive (post-pandemic effects continue to fog the recession-or-not argument, with nominal growth strong and companies saying consumers remain in spend mode), the market rhythms of 2022 have pretty neatly followed some historical templates. Ned Davis Research has a "cycle composite" chart for this year blending the annual seasonal tendency, the election-cycle path and ten-year decade pattern. In shape — but not magnitude — things are pretty well in tune ... for what it's worth. Market breadth Wednesday is strong but not stupendous (2:1 up:down volume on NYSE, 4:1 on Nasdaq). Apple is up 3% and is now back above a 7% weighting in the S & P 500. How much more can it give the index from here? Credit spreads are rushing tighter, confirming the risk embrace. VIX giving way below 22, near the long-term average level, low end of the range. Not inconsistent with a more stable tape recently. Some argue it pays to hedge when cheap and there is a jobs report Friday. But it is summer and the market — right or wrong — is suggesting it's making a tentative piece with the macro/policy setup for now.