
- The US Treasury market started its long-term downtrend in late 2020, followed by bearish reversal patterns in all three major US stock indexes in January 2022.
- The US Federal Reserve made its first rate hike in more than a decade on March 17, 2022.
- Building on this we can see a normal economic cycle as been in place, enhanced by extraordinary events.
As you are likely aware of by now, one of my favorite phrases is, “I remember when I wrote about that”. The thought has popped up again this week as I watch the debate over the fate of US stock markets fall along political sides. The recent mantra, other than the current administration is solely responsible for inflation (there isn’t enough whisky available to have that make sense), is that US stock markets are falling due only to interest rate hikes by the US Federal Reserve. We all know where this argument comes from, but if you don’t, a hint is a segment of society that continues to equate US stock markets with the US economy.
I talked about all this in a piece posted back in June, and given we are another four months down the road I thought it to be a fine time to revisit the subject. The key point we have to keep in mind is economies, not just the US but everywhere, move in cycles with the classic order of events being (from “Intermarket Technical Analysis” by John J. Murphy, 1991 ed., pg. 228):
- Bonds turn up (stocks and commodities falling)
- Stocks turn up (bonds rising, commodities falling)
- Commodities turn up (all three market sectors rising)
- Bonds turn down (stocks and commodities rising)
- Stocks turn down (bonds dropping, commodities rising)
- Commodities turn down (all three markets dropping)
What stage of the cycle is the US in at this point? Based on my most recent monthly analysis US 10-year T-note futures (ZNZ22) are still in a downtrend, as are all three major US stock indexes ($INX) ($DOWI) ($NASX). As for the Three Kings of Commodities corn (ZCZ22), crude oil (CLX22), and gold (GCZ22) are all in long-term downtrends (though gold could be the first to turn back up). This tells me we are in the final stage of this economic cycle, meaning at some point bonds should find a bottom. The problem, though, is it could take a while for US stock markets to turn with my time projection being June 2023.
But how did we get here?
- First and foremost, the US is simply in a normal business cycle made more volatile by abby-normal (Thank you I-gor) circumstances.
- The previous administration wanted a cheap dollar in hopes of enhancing bad trade policy. Therefore, the US Federal Reserve (granted, as well as most central banks around the world) was slow to respond to the first seeds of inflation sown by Twitter-driven trade wars and tariffs.
- Once the global pandemic hit, consumer demand for everything skyrocketed, further fueling global inflation.
- Meanwhile, Mother Nature has continued to show a wicked sense of humor as we move through year three of a La Nina that has reduced global grain and oilseed production.
- And we can’t forget the lack of investment to increase oil production and refining over the last couple decades.
All this added up to global inflation, something stock markets aren’t fond of because the classic response from central banks around the world is to raise interest rates. Todd Hultman, a good friend of mine, recently wrote a top-notch piece on this subject.
Why, then, have US stock markets had such a rough year? The simplest answer is it’s just part of a normal business cycle. But we also have to remember during the time when all the talk was of stocks = economy, prices for many stocks lost touch with their individual fundamentals. However, as we approach the end of October, some of those same stocks have moved closer to what is deemed “fair value”.
Or in other words, Newsom’s Market Rule #6 holds true again: Fundamentals win in the end.
To that I’ll add Newsom’s Market Rule #7 as something to keep in mind: Stock markets go up over time.
More Stock Market News from Barchart
- Investors Find Safety in IBM
- Stocks Rally on Positive Corporate Earnings Results and Lower Bond Yields
- Investors Aren't Waiting for the Alphabet's Q3 Results, Pushing GOOG Stock Higher
- Markets Today: Stocks Sharply Higher for a Second Day as Sentiment Improves