The Cyclical CASP: December 4, 2023
Bullish quantitative evidence rapidly accumulating on the back of FED Chair Powell d/b/a Arthur Burns. On watch for an SPX parabola into January, ala January 2018 and June 2020.
The Cyclical CASP forms the quantitative cyclical outlook for SPX - the topic of this report - while the qualitative cyclical outlook is developed via zooming out and processing the direction and interaction of FED policy, the economy, and interest rates. Before diving into the quantitative, a quick word on the qualitative cyclical outlook.
As discussed at length in the SPX Market Outlook, the qualitative cyclical outlook for the next 1-12 months is a tale of three parts: a near-term Goldilocks rally on falling rates and still-strong economic data into early 2024, a growth scare in 1H24, and a Treasury-engineered rally into Election Day 2024. At first blush the qualitative outlook is neutral instead of the current “bearish” rating I have assigned to it; but in this highly unusual economic and market cycle, nothing moves in a straight line. So, before I upgrade the qualitative cyclical outlook to neutral (it is unlikely to be upgraded to bullish given the highly negative 2025 outlook, but I would need to revisit that bearish 2025 thesis if in fact the Fed pulls a Burns and starts cutting in March), I need to see the market digest the slowdown in economic data likely to hit in the coming weeks/months. It’s against this qualitative cyclical outlook backdrop that the quantitative outlook needs to be digested.
As outlined in detail below, the weight of the quantitative cyclical evidence is quickly shifting into the bullish camp. This is incredibly counterintuitive relative to a decisively bearish structural outlook for the economy and stocks looking out to May 15, 2026 - the end of Jerome Powell’s term as FED Chair - but the data are the data. It’s likely a time frame issue, which is why I like to break the outlook down into its structural (1-2 years), cyclical (1-12 months), and tactical (1-4 weeks) components.
My hunch is that the bullish quantitative data is picking up on a supportive cyclical environment for risk assets in a POTUS election year with two very savvy market operators (Treasury Secretary Janet Yellen and NEC Director Lael Brainard) sitting on over $1 trillion of market-supportive QE stockpiled in the TGA and RRP. This bullish cyclical outlook is likely to be confirmed in the coming days/weeks with a series of powerful breadth thrust signals (some have already fired), but as history suggests these signals more often than not mark a near-term top in equities. The nature of the post-breadth thrust pullback, likely alongside a “scary” deterioration in economic data, will inform an updated qualitative view of the cyclical outlook into year-end 2024.