“Equities will remain mired in a bear market until we see a turnaround in global growth, a revival in investor sentiment and positioning, and a resurgence in excess liquidity.” (BLOOMBERG)
The backdrop for stocks is bearish and recent rallies have all failed sure we will continue to see pops to the upside, but the big bearish fundamentals will continue to drive stocks lower…
There is a US and global economic slowdown which will get worse as we come into the New Year. Higher rates around the world along with protracted Covid restrictions in China have hit global growth but there is still more downside to come.
A Global and US Economic Recession
Interest rates worldwide have increased at a fast pace and while this pace is slowing up and, and peak global hawkishness is behind us, the impact of high rates will continue to weigh on the global economy and equities.
“We find ourselves in a weird situation. Not only is the consensus predicting a global recession next year – which is unheard of – but central banks, once the cheerleaders of the world economy, are equally pessimistic. The bad news: they have a decent record at spotting cyclical peaks. The worse news: central banks always underestimate recession severity" (TS Lombard)
US PMI's missed forecasts this week and are in contraction territory...
Economic Surprises Falling
In terms of economic surprises: “After an extended period of ranging we now have economic surprises breaking through the range to the downside. SPX moving in perfect tandem during this latest downturn.... demonstrating who is in the driver's seat....” (TME)
Leading Indicators Need to Bottom
We will probably not see the lows in equities until the US LEI (leading economic indicator) bottoms.
Investor sentiment will not turn around yet and liquidity has been drained from the financial system by not just interest rate hikes but the Fed withdrawing the massive stimulus it did to combat COVID this liquidity is now being withdrawn from the market. Keep in mind, this stimulus by several measures was responsible for 90% of the rally in the SP500 from COVID lows to all-time highs which was a rise of 100%. Even with the decline, we have seen in stocks Price/ Earnings valuations remain at levels that are not to far from the peak of the DOTCOM bubble.
The global economy will go into recession and we would not expect the backdrop for stocks to turn bullish again until well into 2023 - the big trend is down and rallies are selling opportunities in the SPX
In terms of the key levels of support and resistance, our views are below in terms of both monthly and daily charts.