There are multiple signs that a new bull market is emerging despite a bevy of narratives that the recent stock rally is a bear trap. Historically, bull markets begin when the economic news is at its worst. And typically, new bull markets lead an upward turn in the economy anywhere from 3 to 11 months, according to our research. Here are five reasons which make a strong case that the stock market is headed up.
In early 2022, the outbreak of war sent many stock markets around the world into a funk owing to economic upheaval and fears about the start of a brutal recession. Without question, the Russo Ukraine War has caused turmoil in European economies due to diminished deliveries of Russian natural gas and oil. European countries have been forced to seek alternative sources to meet their energy needs. In doing so, however, Europe has pivoted away from Russia energy and filled this void by turning to the US, Africa, and Scandinavia. This transition has proven to be smoother and faster than expected. Germany which has been the most reliant on Russian natural gas (previously 45% of European imports), surprisingly saw its economy expand in the 3rd quarter. As of this writing, the DAX Index (German stock market) has rallied 25% off its low which technically implies that a new bull market has begun. Moreover, this index is within 8% of its all-time high. France’s economy also grew in the 3rd quarter. France’s CAC 40 Index is up 18% off its low and now is trading 5% below its all-time high. Even the United Kingdom, regarded as the ‘sick man’ in Europe, due to having the highest inflation rate coupled with the highest labor unrest among European countries, is seeing higher stock prices. The FTSE 100 Index has now risen to a 4-year high.
Golden Eagle’s research shows that there tends to be a correlation between bear market declines and magnitude of decline in profits based on S&P 500 data. Consider that in the 2008 bear market, the S&P 500 Index declined 57% while S&P profits dropped 40%. During the pandemic year of 2020, the S&P 500 Index slid 34% in the face of a 15% drop in profits. In this cycle, the S&P dropped 25% despite corporate profits increasing 6% last year. Therefore, we think that the 23% peak-to-trough decline by the S&P 500 Index from January through September adequately has discounted an economic downturn and a possible profits shortfall. Moreover, the consensus of thought now assumes that if a recession does take hold, it will be mild and brief.Our worst-case scenario assumes that overall profits will decline no more than single digits which would be far less severe than profit declines in both 2008 and 2020. Further, it is notable that expectations for a recession have been pervasive for many months. Accordingly, businesses have already taken proactive steps to gird for a downturn. For example, the major US banks set aside $4 billion in reserves in the 4th quarter for this contingency and many companies have been in a cost cutting mode for months.
Despite periodic interruptions, the economy has grown over the past century with long treasuries yielding 5.0% on average during this span. Currently, long bonds are yielding 3.8% and 90-day T-bills 4.5%, so there is still some room remaining for the Fed to move rates higher before reaching a level that could throw the economy into reverse. Further, the CPI has receded from its peak of 9.1% in June to 6.1% in December. Thus, we believe the Fed will likely be less aggressive in raising rates going forward. History tells us that the economy can grow with interest rates at current levels and even at somewhat higher levels.
In the US, the Dow moved into bull market territory on Friday, January 13th marking a gain of 20% off its bottom, whereas the S&P 500 has risen 12%. Following a disappointing showing in the stock market in December, the first two weeks of January got off to a good start (the selling climax could potentially have occurred on December 23rd as equity mutual funds were hit by a record weekly outflow of $41.9 billion). Against this backdrop, current economic forecasts predict a strengthening of the world economy in late 2023 or early 2024 which dovetails nicely with the historical trends suggesting new bull markets lead the turn in the economy by 3-11 months.
Golden Eagle collects data on the 52-week new high and new low lists to monitor stock market trends. On January 12th of 2022, the daily list of new lows started to dramatically outnumber new highs which continued until year end. In 2023, the number of 52-week new highs has exceeded the number of new lows every day so far this year. If this trend holds, the stock market has nowhere to go but up. In summary, our view is that if a recession does take hold this year, the impact on profits will be minimal. The consensus now holds that the economy will strengthen in the second half of this year. If so, the timing would be in sync with the stock market leading the turn in the economy by 3 to 11 months as noted before.In sifting through the tea leaves, we believe that a market recovery is potentially underway. Once again, Golden Eagle reiterates its outlook for a major stock market recovery in 2023
There are multiple signs that a new bull market is emerging despite a bevy of narratives that the recent stock rally is a bear trap. Historically, bull markets begin when the economic news is at its worst. And typically, new bull markets lead an upward turn in the economy anywhere from 3 to 11 months, according to our research. Here are five reasons which make a strong case that the stock market is headed up.
In early 2022, the outbreak of war sent many stock markets around the world into a funk owing to economic upheaval and fears about the start of a brutal recession. Without question, the Russo Ukraine War has caused turmoil in European economies due to diminished deliveries of Russian natural gas and oil. European countries have been forced to seek alternative sources to meet their energy needs. In doing so, however, Europe has pivoted away from Russia energy and filled this void by turning to the US, Africa, and Scandinavia. This transition has proven to be smoother and faster than expected. Germany which has been the most reliant on Russian natural gas (previously 45% of European imports), surprisingly saw its economy expand in the 3rd quarter. As of this writing, the DAX Index (German stock market) has rallied 25% off its low which technically implies that a new bull market has begun. Moreover, this index is within 8% of its all-time high. France’s economy also grew in the 3rd quarter. France’s CAC 40 Index is up 18% off its low and now is trading 5% below its all-time high. Even the United Kingdom, regarded as the ‘sick man’ in Europe, due to having the highest inflation rate coupled with the highest labor unrest among European countries, is seeing higher stock prices. The FTSE 100 Index has now risen to a 4-year high.
Golden Eagle’s research shows that there tends to be a correlation between bear market declines and magnitude of decline in profits based on S&P 500 data. Consider that in the 2008 bear market, the S&P 500 Index declined 57% while S&P profits dropped 40%. During the pandemic year of 2020, the S&P 500 Index slid 34% in the face of a 15% drop in profits. In this cycle, the S&P dropped 25% despite corporate profits increasing 6% last year. Therefore, we think that the 23% peak-to-trough decline by the S&P 500 Index from January through September adequately has discounted an economic downturn and a possible profits shortfall. Moreover, the consensus of thought now assumes that if a recession does take hold, it will be mild and brief.Our worst-case scenario assumes that overall profits will decline no more than single digits which would be far less severe than profit declines in both 2008 and 2020. Further, it is notable that expectations for a recession have been pervasive for many months. Accordingly, businesses have already taken proactive steps to gird for a downturn. For example, the major US banks set aside $4 billion in reserves in the 4th quarter for this contingency and many companies have been in a cost cutting mode for months.
Despite periodic interruptions, the economy has grown over the past century with long treasuries yielding 5.0% on average during this span. Currently, long bonds are yielding 3.8% and 90-day T-bills 4.5%, so there is still some room remaining for the Fed to move rates higher before reaching a level that could throw the economy into reverse. Further, the CPI has receded from its peak of 9.1% in June to 6.1% in December. Thus, we believe the Fed will likely be less aggressive in raising rates going forward. History tells us that the economy can grow with interest rates at current levels and even at somewhat higher levels.
In the US, the Dow moved into bull market territory on Friday, January 13th marking a gain of 20% off its bottom, whereas the S&P 500 has risen 12%. Following a disappointing showing in the stock market in December, the first two weeks of January got off to a good start (the selling climax could potentially have occurred on December 23rd as equity mutual funds were hit by a record weekly outflow of $41.9 billion). Against this backdrop, current economic forecasts predict a strengthening of the world economy in late 2023 or early 2024 which dovetails nicely with the historical trends suggesting new bull markets lead the turn in the economy by 3-11 months.
Golden Eagle collects data on the 52-week new high and new low lists to monitor stock market trends. On January 12th of 2022, the daily list of new lows started to dramatically outnumber new highs which continued until year end. In 2023, the number of 52-week new highs has exceeded the number of new lows every day so far this year. If this trend holds, the stock market has nowhere to go but up. In summary, our view is that if a recession does take hold this year, the impact on profits will be minimal. The consensus now holds that the economy will strengthen in the second half of this year. If so, the timing would be in sync with the stock market leading the turn in the economy by 3 to 11 months as noted before.In sifting through the tea leaves, we believe that a market recovery is potentially underway. Once again, Golden Eagle reiterates its outlook for a major stock market recovery in 2023
Manager of the Golden Eagle Growth Strategy
