The Outlook: The Bear is Just Waking Up
SPX 4000 is the new peak. The Fed is currently raising rates in a recession with an anti-Arthur Burns reaction function, and at 4000 SPX is 22x normalized peak EPS. -43% downside lies ahead.
As discussed in the “It’s the Yield Curve, Stupid”, the S&P 500 is at a fork in the road. Fork #1 is a new bull market as indicated by improving credit conditions, breadth thrust signals, and a breakout in cyclical sectors and factors. Fork #2 is a resumption of the bear market, driven by the Fed re-tightening financial conditions to ensure enough economic restraint remains in place to bring inflation back to 2%. A deep and persistent 3y/10y US Treasury curve inversion breaks the tie, suggesting market participants should be on watch and positioned for a resumption of the bear market. But those are rather short-term tactical “trees” well-covered by the mainstream market conversation. It’s time to zoom out and focus on the strategic “forest” that is the likelihood this bear market is just getting started.