Weekly Report | S&P 500 and Recession

Another weekly report being built based on the data collected daily. Data that tells us where we are in the market cycle – micro and macro – in various perspectives and also for the future direction of the large-scale economy, mainly due to energy issues caused by the terrible and sad war between Russia and Ukraine. Inflation is galloping at unimaginable levels: as I was reporting months ago.

S&P 500 RATIO vs 200-Day AVERAGE

The image above portrays that we are already in a deeper 200-day average correction than we imagined, however, we can still reach much lower levels – comparing to 2020 and 2018 In the following images, I discuss that this is very likely to occur due to high inflation, low American interest rates and a high energy crisis. We are entering a process of world economic recession.

RELATIONSHIP BETWEEN CONSUMER TRUST AND S&P 500

Since 1999 this data has been collected and disseminated. Impressive how the consumer confidence index has been in a decreasing process since 2020, post c0vid, and even so the markets continue to be unjustifiably high. Therefore, it shows us that listed companies will report lower profit margins throughout 2022/23. This process is long, but foolproof.

It is clearly noted that, historically, financial markets have always corrected their high indices to suit the current level of consumption.

It is estimated that the S&P 500 could reach 3900 points in this case of economic recession (Bear Case), as noted below. If the rise persists due to emotional and behavioral issues of individuals active in the markets, a transitory Bull Case could reach 5000 points.

David Hunter, an experienced investor with over 40 years in the market, raises the Bull Case to 6000 points before a complete meltdown of the S&P 500.

RETURNS AFTER CORRECTIONS

Data collected since 1982 shows that the same S&P 500, after declines greater than 10%, had great returns in the following 2 (two) years. The most expressive and painful case for investors was characterized precisely when Bolha.com collapsed, in 1999/00.

ALTERNANCE BETWEEN ‘GROWTH’ AND ‘VALUE’

Note how there is always an alternating pattern of investor flows between ‘Growth’ vs ‘Value’ companies. Since 1995 this same pattern has been noticed. What impresses me even more is that even with so much data, the default behavior is still in effect. At times they overvalue one sector, making them very expensive, and absurdly devalue the other, making them very cheap.

The general behavior, now massified by social media, still helps in the strength of these pendulums. Probably, if you stay in the opposite direction of this flow, you will obtain huge returns over the years because you will always buy very cheap and sell very dear. That is, it will always be on the other side of the “counter”!

RELATIONSHIP S&P 500 x FED x GEOPOLITICAL EVENTS

To every crisis, geopolitical or not, the market always reacts in the same way: despair and relief. Above you can see the items in Red describing the most emblematic crises since 1985 and their effects on American financial markets. Among the collective emotions in crises, what really worries me the most to position myself at the most appropriate moment is exactly the relationship between interest rates (Green Line) and theS&P 500.

Interests are negative, S&P is at its highs – even after the current correction – and that’s not good for the future as every time the Federal Reserve speculated raising its rates, the market reacted abruptly. With current inflationary issues, any prospect of interest rate hikes would painfully implode the market. The last times interest rates rose, the markets responded harshly to it: 2000 and 2009.

Notice how the S&P 500 (Blue) is responding to, and absorbing, monetary stimulus from the Federal Reserve (Black). If, for a moment, the Fed decides to shut down its huge press, I definitely don’t want to be in this market.

HISTORY RELATIONSHIP BETWEEN S&P 500 vs RETURNS IN THE MONTH MARCH

Something just curious! Would it be for simple behavioral relationships? Since this data is always disclosed, it can directly interfere with the psychological and emotional instinct of individuals. If year after year, it is always reported that the months of March are the worst in terms of income, who would like to suffer a “loss”? Certainly most individuals do not act in a logical and conscious way, therefore, they are led by thousands of futile and absurd information of an informative nature only.

The market reacts to the herd effect.

OIL PRICE RELATIONSHIP vs RECESSIONS

Now, let’s get to a really interesting fact: since 1970 there has been a direct relationship between the price of crude Brent Oil and major economic recessions. It is clear that every time the price of oil reached, or exceeded, the value of $80 dollars, we were heading towards a deep recession. Right now, on March 3rd, Brent’s value is at ~$119 dollars. Make your conclusions!

The war between Russia and Ukraine has helped to worsen the energy macroeconomic context that started in 2020 with c0vid. Clean energy policies have trivialized and underestimated the world’s need for Oil, Gas and Coal, creating an inflationary energy monster all over the world, mainly European, which depends almost exclusively on Russia for energy.

We’re just getting started.

According to the image above, the main Bank of Germany already estimates the price of Brent oil at ~$140 dollars.

U.S Treasure vs BIG TECH’s RATIO

As ​​shown above, Big Tech actions (Dark Blue) will still undergo a strong correction to keep up with the 10-year TIPS (Light Blue). Since January 2020 there is a strong correlation between the two indicators.

RISK AND RECESSION

Surely a severe recession is knocking at our door! We have already observed in several previous contexts that the market has been pricing this recession since December 2021 and in a forceful way in February 2022. The Russell Index has already started to indicate since March 2021: already proven in last year’s reports.

And finally, interest in the S&P 500 has been deteriorating with each subsequent month. Now in 2022, the index reached 1.5%: the same indicator that Bubble.com burst. The next few years will not be easy.

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