Martin Pelletier: The probabilities point to a win for those betting on the house rather than persistently against it
By Martin Pelletier
I try to do a grateful meditation session every night, which was especially fitting this past Thanksgiving weekend, but I must admit it has been a difficult year for money managers and investors to be grateful since the selloff in both bonds and stocks has made it one of the worst on record.
This is a time when it is most important to have a process and not deviate from it despite all the negativity, because there are some very encouraging signs of what lies ahead if you look close enough.
“If you think every bear market leads to a global crisis, you’re going to have awful long-term returns and a ton of anxiety on top of it,” Michael Batnick, managing partner at Ritholtz Wealth Management LLC, said in a recent piece, Was that the Bottom?
For example, who knows what will happen in the near term, especially if seasonality plays out or the United States Federal Reserve capitulates, thereby motivating some of that mountain of cash on the sidelines into the market.
Over the past 20 years, the S&P 500 has gained, on average, 4.1 per cent during the fourth quarter, according to Barchart, while the MSCI has only declined three times during that same period.
“Lots of bad news across the markets but perhaps a bright spot. Over the last 20 years, the S&P 500 has gained, on average, 4.1% during the 4th Quarter while the MSCI has only experienced a decline 3 times over that same period. pic.twitter.com/7ajx3ZW5y8”
— Barchart (@Barchart) October 3, 2022
Barchart also points out that the composite sentiment indicator created by Sanford C. Bernstein & Co. is now so negative that a buy signal has formed. The indicator’s buy signal has preceded positive returns over the next four weeks more than 70 per cent of the time since 2000.
According to Batnick, as of Sept. 30, “less than 85 per cent of stocks in the S&P 500 were above their 200-day moving average. This has happened 219 times since 1987, with most of these periods clustered together: 1987, 2002, 2008, etc. The only time returns weren’t positive one year later was September 2001 (-13 per cent), and October 2008 (-six per cent). That’s it.”
The big question is what the catalyst will be? We continue to think it still comes down to the Fed capitulating on its aggressive tightening stance. The good news is that some of the core factors it watches with regards to inflationary pressures are showing signs of improvement.
Housing is one of them, and U.S. apartment demand “has unexpectedly evaporated in much of the country due to what appears to be a freeze in new household formation,” Jay Parsons, head of economics at RealPage Inc., said. Net absorption in Q3 was negative for the first time in 30 years.
It is just a matter of time before residential housing pricing decelerates, even under a hike-and-hold scenario, since the current situation is not sustainable. If you could afford to make a 20-per-cent down payment and pay US$2,500 per month, you could purchase a US$750,000 house before the rate hikes, according to Michael McDonough, chief economist, Financial Products, at Bloomberg. Today, that US$2,500 payment gets you a US$476,000 house.
Another key factor is the jobs market and that’s weakening as well. “Job openings could come down significantly — and they need to — without as much of an increase in unemployment as has happened in earlier historical episodes,” Fed chair Jerome Powell said on Sept. 22.
In this regard, the recent U.S. JOLTS report showed that more than a million job openings were canceled in August, a 10 per cent drop from the 11.17 million reported in July. It was also the biggest one-month decline since April 2020 in the early days of the COVID-19 pandemic.
Finally, there is the rocketing U.S. dollar, which has been a global wrecking ball thanks to a mismatch in the Fed’s stance against other central banks whose economies are in a much weaker position and unable to keep pace with rate hikes.
At the end of September, we calculate the U.S Dollar Index was up almost 22.5 per cent over the past 12 months, with most of the gains starting in April. The Canadian dollar fell nine per cent, the Australian dollar 12 per cent, the euro 17.5 per cent and the pound 21.5 per cent over the same period.
Even the United Nations is calling on the Fed to pause its rate hikes, warning that further policy tightening risks a global economic downturn.
Put all this together and we think we are getting close to the lows. There always remain tail-risk events, but the probabilities point to a win for those betting on the house rather than persistently against it.
It can be impossible to get the timing right, since market bottoms are a process, but at least there is finally a light at the end of what has been a dark tunnel this year. This, I can be grateful for.
Source: Financial Post