Hints of 1982 Have a Strategist Who Says the Bear Market is Over: Morning Brief


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Tuesday, August 2, 2022

Today’s newsletter is from Myles Udland, senior marketer at Yahoo Finance. Follow him on Twitter @MylesUdland and further LinkedIn.

When the closing bell rang last Friday, the S&P 500 posted its best monthly gain since November 2020.

The apparent enthusiasm of investors in July may be mind-boggling given the economic and earnings environment facing the markets.

But to Tom Lee, co-founder and head of research at Fundstrat, the market’s recent rally makes perfect sense. Additionally, Lee argues, history suggests we may be on the cusp of a more powerful push higher into the end of 2022.

“Biggest takeaway for me at this week’s events?” In a note published Friday, Lee asked, “Convincing and demonstrable evidence that the bottom has been reached – the 2022 bear market is over.”

Last week, the Fed raised interest rates by another 0.75%. GDP data showing a second consecutive quarter of negative GDP growth. Recent housing data showed a notable slowdown in arguably the most important sector of the economy. And looking abroad, news broke that Russia was further cutting off gas supplies to Germany as Europe prepares for a potentially frigid winter amid Russia’s war in Ukraine.

And yet the markets rose.

“If bad news doesn’t bring the markets down,” Lee added, “it’s time for investors to judge.”

This week started with data from FactSet released Monday showing that analysts have made larger-than-normal cuts from third-quarter estimates. In other words, analysts are more bearish than usual about corporate earnings. And this overall cut in earnings expectations comes amid high-profile flops from the likes of Meta Platforms (META) and Intel (INTC) in the past week.

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Fundstrat’s optimism, however, goes beyond a view that assumes the worst news for investors is over. In recent weeks, Fundstrat has argued that the market stance is similar to investors’ August 1982 — a moment that preceded a fierce rally in stock markets amid a Fed pivot.

In the summer of 1982, the US economy was in recession and then Fed Chairman Paul Volcker had not yet indicated whether the Fed would ease its campaign to slow inflation.

Federal Reserve Board chairman Paul Volcker stands with hands on hips and smokes a cigar during a meeting in Washington, 1982. (Getty Images)

In October of that year, Volcker signaled that the Fed could dampen efforts to slow inflation. “The forces are there that would push the economy into recovery,” the New York Times reported in a speech. “I would think the policy objective should be to support that recovery.”

For investors, “maintain that recovery” marked the beginning of a nearly 20-year bull market in equities. Two months before the pivot, markets snooped on the Fed’s plans—and in just four months wiped out all the losses of a 22-month bear market that saw the S&P 500 plunge 27%.

And this 40-year-old rally is why, according to Lee, the S&P 500 could bounce back above 4,800 by the end of this year and hit new all-time highs. Last week, Lee noted that the bond market has cleared more than 0.5% of the Fed’s projected rate hikes through next spring.

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“The bond market has made a serious dovish pivot in pricing Fed funds through 2023,” Lee said. “Is it any wonder that stock markets gained a foothold in July?”

Source: Fundstrat

Source: Fundstrat

In addition, Lee sees market pricing in a growth spurt rather than a full-blown recession.

As was much discussed in the spring, the S&P 500 is down 32% on average during a typical US recession. From peak to trough, the S&P 500’s decline reached 23% during its current dip from record highs. And if a recession is avoided, the over 30% drop many investors have been preparing for may never materialize.

Last week’s GDP data sparked a lively conversation about whether the US economy was already in or about to fall into recession. Two negative quarters of GDP growth will at least meet the criteria of a “technical” recession. But as we highlighted Friday, economists at Bank of America outlined why a formal recession call is unlikely to be on the horizon anytime soon.

Manufacturing sector data released Monday also provided evidence of a slowdown in growth, but not necessarily an outright recession.

According to the Institute for Supply Management’s latest Purchasing Managers’ Index (PMI), US manufacturing growth fell to a two-year low in July. The PMI showed its largest single-month decline in the pace of price increases ever, but still stood at 52.8 — and any reading above 50 points to industry expansion.

Survey data from S&P Global also showed a slowdown in output growth amid a notable decline in inflationary pressures, but this is a trade-off the Federal Reserve made clear last week and is willing to make.

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“Supply chain issues remain a major problem but have eased, putting some pressure on prices for a variety of inputs,” wrote Chris Williamson, chief economist at S&P Global Market Intelligence. “This has led to the smallest increase in the price of goods leaving the factory gates in nearly a year and a half, with inflation cooling off sharply to add signs that inflation has peaked.”

What to watch today

Economic calendar

  • 10:00 a.m. ET: JOLTS vacanciesJune (11,000 million expected, 11,254 million in previous month)

  • Wards Total Car Sales (13.4 million expected, 13 million in previous month)



  • Airbnb (ABNB), Arconic (ARNC), Assurant (AIZ), Caterpillar (CAT), Caesars Entertainment (CZR), Camping World Holdings (CWH), CenterPoint Energy (CNP), Cirrus Logic (CRUS), Cummins (CMI), CoreCivic (CXW), DuPont (DD), Electronic Arts (EA), Evoqua Water Technologies (AQUA), Exact Sciences (EXAS), FMC (FMC), Gilead Sciences (GILD), Herbalife Nutrition (HLF), Henry Schein (HSIC ), Huntsman (HUN), Incyte (INCY), JetBlue Airways (JBLU), Lear (LEA), Leidos Holdings (LDOS), Marathon Petroleum (MPC), Marriott International (MAR), Molson Coors Beverage (TAP), Match Group (MTCH), Microchip Technology (MCHP), MicroStrategy (MSTR), Occidental Petroleum (OXY), PayPal Holdings (PYPL), Prudential Financial (PRU), Solaredge Technologies (SEDG), SunPower (SPWR), Solarwinds (SWI), Starbucks (SBUX), TrueCar (TRUE), Uber Technologies (UBER), Wynn Resorts (WYNN), Zebra Technologies (ZBRA)

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