1. Stock market bottomed out in October, poised for gains due to inflation and high-yield bond spread peaks, S&P 500 rise in first 5 days, consecutive quarterly gains, trading above 52-week moving average, and overly bearish investor sentiment.
2. Market defying gravity with six reasons to suggest a new bull market, including inflation, high-yield bond spread peaks, S&P 500 rise in first 5 days, consecutive quarterly gains, trading above 52-week moving average, and overly bearish investor sentiment.
Well, folks, it’s time to dust off those suitcases full of cash, because the stock market seems to have bottomed out in October, and a new bull market is ready to charge. Fundstrat’s Tom Lee has identified six reasons why the market has hit its low point and is poised for more gains.
First, inflation, the monster that devours our wallets, peaked in June 2022 with an annualized rate of 9.1%. Lee reminds us that in previous bear markets, equities bottomed out when inflation reached its peak. So, with inflation now sitting at a more manageable 5%, it seems we’ve got nowhere to go but up.
Second on the list, high-yield spreads have also reached their zenith. Lee points out that high-yield bond spread peaks often signal equity bottoms. And guess what? The high-yield option adjusted spread hasn’t made a new high since July 6th, 2022. If that’s not enough, an index of high-yield bonds has leaped 7% from its 52-week low and is up just over 2% year-to-date.
Third, the rule of the first five days comes into play. Since 1950, when the S&P 500 has risen more than 1% in the first five trading days of the year, the market has finished higher 87% of the time, with an average gain of 15%. Like a well-timed punchline, the S&P 500 followed suit this year, setting the stage for a potentially lucrative 2023.
Fourth, the S&P 500 has posted back-to-back quarterly gains of at least 5% in the past two quarters. And if history is any indication (and it usually is), the stock market has an 87% chance of climbing even higher the following year, with an average gain of 13.5%. A bear market with two consecutive quarterly gains? That would be like finding a penny on the ground and discovering it’s actually a winning lottery ticket.
Fifth, the stock market has been trading above its 52-week moving average for about six months. Since 1950, no market has made a new low in 12 instances when this happened. It’s like the market is defying gravity, but instead of floating away, it’s staying firmly above its moving average and preparing for takeoff.
Lastly, investor sentiment is overly bearish. Earlier this year, the gap between bullish and bearish responses in AAII’s weekly investor sentiment survey hit an extreme low, a phenomenon that has occurred only two other times since 1987. Interestingly enough, both of those instances (1991 and 2009) followed significant market lows, suggesting that a new bull market is on the horizon.
Now, you might be thinking, “But aren’t equity valuations stretched?” Fear not, dear readers, for Lee asserts that the market is 80% below fundamentals, and the S&P 500’s P/E ratio for 2024 is at a comfortable 15x, excluding FAANG stocks. Defensive sectors like consumer staples, utilities, and healthcare are the pricey ones, with P/E ratios of 19.6x, 17.5x, and 16.7x, respectively.
So there you have it, a smorgasbord of reasons to believe that we’re on the cusp of a new bull market. Of course, the stock market will always be a risky endeavor, and predicting the future with absolute certainty is about as easy as teaching a cat to tap dance. Nevertheless, for those with the courage to take risks, the potential rewards could be quite substantial. After all, as Tom Lee so eloquently put it, “Pick your poison. We see new bull.”