- The S&P 500’s rally since mid-October is due to retrace itself to new lows, Jeff Bierman says.
- Bierman is the chief market technician at TheoTrade.
- Year-to-date the S&P 500 is down 17% as the Fed tightens policy to rein in inflation.
Professor Jeff Bierman doesn’t understand the bullish sentiment that has driven the S&P 500’s performance in recent months.
Since October 12, the benchmark index is up almost 11% mostly on news of moderating inflation and Federal Reserve Chairman Jerome Powell acknowledging that the central bank will have to downsize its rate hikes.
Those things certainly sound bullish, but there are two problems as far as Bierman is concerned. Bierman is the chief market technician at TheoTrade, and held the same position at TD Ameritrade between 2007-2015.
One problem is that the market already knew the Fed likely wouldn’t carry on with its 75-basis-point hikes, and some investors seem to be mistaking this admission from the central bank as a pivot. Instead, the Fed is likely to cut down to 50 or 25-basis-point hikes, and will probably keep rates high for an extended period.
The Fed has been tightening policy this year at the fastest pace in decades in an effort to cool the highest inflation rates since the early 1980s. Their stated long-term target for inflation is 2%, and officials have repeatedly said they’re not done hiking rates yet.
The Consumer Price Index climbed as high as 9.1% in June and cooled to 7.7% in October, a reading that sent stocks soaring 3% in intraday trading on November 10. November’s reading will be announced by the Bureau of Labor Statistics on December 13.
The second problem is that the US economy is already in a recession, Bierman says. That’s debatable — US GDP posted negative year-over-year growth in the first two quarters this year, but unemployment remains historically low at 3.7% and the US added more jobs (236,000) than expected (200,000) in November.
As Bierman points out, however, spending is cooling and personal savings rates are at their lowest since 2005. At a time when interest rates are high, this will mean heightened defaults on things like credit cards, he said.
But the number one indicator for Bierman that the US economy is in recession is the yield curve. The gap between yields on 2-year Treasury notes and 10-year Treasury notes continues to grow. On Friday, the 2-year yield sat at 4.33%, while the 10-year was at 3.57%.
Usually, yields on longer-duration bonds are higher to compensate for higher risk. But when yields invert like this, like they have before every recession since the 1950s, it signals near-term fears about the economy as investors pile into safehaven long-term assets. Yields on bonds rise when their prices fall.
Recessions, Bierman said, usually last 16-18 months. That’s true for recessions since the 1850s, but since World War II they’ve have been shorter at around 11 months, according to Kiplinger. The recession surrounding the Great Financial Crisis lasted 18 months, however.
“If we’re in month 6-8 now, you’ve just got to pack it in and say well, give it another 6-8 months. Maybe we start to turn the corner past July,” said Bierman, who’s an adjunct finance professor at both Loyola University Chicago and DePaul University.
He added: “People need to temper their expectations. They’re way too bullish here.”
Bierman thinks it’s probable that the S&P 500 will fall to around 3,200 (19% downside from here) and bottom around Q3 next year. The further the market falls, however, the more bullish he will be.
“3,000 or a tad below might be able to sort of rebuild a new bull market, but not until then,” he said. “An overshoot would put the nail in the coffin.”
Bierman’s views in context
Bierman’s call for a fall to around 3,200 or below is in line with some of the more bearish calls among Wall Street strategists and money managers.
Morgan Stanley’s Chief US Equity Strategist Mike Wilson warned last week that stocks are in the midst of a bear-market rally.
“This rally will go further and will probably drag people back into thinking that this bear market is over,” he told Bloomberg.
He told CNBC in late November that he sees the S&P 500 bottoming between 3,000-3,300 between before May 2023.
Goldman Sachs’ Chief US Equity Strategist David Kostin also said that the index would bottom around 3,150 if the economy enters a recession. though his base case is for a near-term bottom at 3,600.
Glenmede’s CIO of Private Wealth Jason Pride also said in a note this week that the bear market is likely only 2/3 of the way to its bottom. He put the current bear market in context with the average bear market since the 1940s.
Pride, like Bierman, also pushed back against the notion that a Fed pivot is near.
“Powell pushed back on any notion that the recent moderation in price increases was indicative of a sure sign that inflation will continue to cool. In fact, he repeatedly emphasized that policy would need to remain tight ‘for some time’ to restore price stability,” Pride said in a note with his colleagues Michael Reynolds and Ilona Vovk. They referenced Powell’s November 30 speech at The Brookings Institute.
“Investors should not underestimate the Fed’s fortitude in controlling inflation, i.e. tighter policy for longer,” they added.
Next Tuesday’s CPI reading will be crucial to how stocks perform in the months ahead. If inflation continues to meaningfully subside, the Fed will sooner be able to back off of their hawkish tilt, helping the economic outlook. If it’s higher than investors would like, it could signal further trouble ahead.
Economic data will also be important. If jobs gains substantially slow and the unemployment rate begins to rise above 4%, it could signal that economy is about to unravel, and the market will likely follow.