Selling Bear Market Rally | Finding Alpha

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The bear market rally was sharp but short-lived. JPMorgan’s Jamie Dimon offers the latest excuse for an oversold rally.While the U.S. economy remains strong, the bank’s chief executive said at the Morgan Investor Day conference on Monday, May 23 Gather storm clouds. “I call it a storm cloud because they are a storm cloud. They may dissipate,” he said, suggesting the typical bland speech of an optimistic bank CEO. During this period, he also raised the bank’s outlook on net interest margins at bank conferences, leading to the usual march of Dimon followers to celebrate the climax of his confidence in the economy.

Maybe Dimon has to impress PT Barnum, as JPMorgan’s stock has fallen 30% so far this year. But before you believe Dimon is some economic oracle, listen to his forecast for U.S. economic growth when he publicly announced his 2022 outlook on Jan. 11, “We’re going to have the best growth year ever. , I think, maybe sometime after the Great Recession.” He said this in a quarter that subsequently showed an annualized contraction of 1.4%. The bad economic data didn’t stop at the end of the first quarter. The S&P Global U.S. Composite PMI output, which tracks manufacturing and services, fell to 53.8 in May from 56.0 in April, suggesting the economy was rapidly approaching contraction territory in the second quarter. A range of manufacturing PMIs also supported the view that the U.S. and broader global economy is faltering. The slump in home buying and refinancing activity suggests danger is looming. Still, despite the sharp slump in economic data, the financial press is promoting Wall Street analysts’ view that earnings growth will actually be strong this year and next.

This is one of the reasons why the bear market bottom has not yet been reached. In fact, if the stock market is to return to a more normal valuation level, where total stock market capitalization equals the economy’s total annual output, it would have to fall 37% from current levels. But bear markets rarely, if ever, just lower to fair valuations; once the market shows broad indicators that it is undervalued, they usually break out of that level and find support. So despite the brutality of the bear market, the big reconciliation in asset prices should continue.

How cruel is it? Ycharts calculated the percentage declines from all-time highs for some widely held stocks over the weekend.

% from all-time high

YCharts

As bad as it is, it’s more of a sign that the market is overvalued than a sign of an imminent bottom.

Vanda Research recently reported that the average retail portfolio is down 32% this year. And the bloodbath isn’t limited to stocks. The flagship cryptocurrency (BTC) is down 55% since November, long-term Treasuries are down 20% year-to-date, and the housing bubble is next in line to burst. In fact, signs of a housing market meltdown can be found in the 6-month decline in the Pending Home Sales Index.

The bear market should last until enough deflation is evident before it can provide economic and political cover for Chairman Powell to turn dovish. But that probably won’t happen until around September or October. However, over the next four months, Powell will raise the federal funds rate by another 125-150 basis points and burn $250 billion from the base money supply.

There is still a lot of damage to be done as we wait for inflation to fall back to 2%. So investors shouldn’t expect a “Fed put” in the near term just because the economy is decelerating rapidly. The Fed is now blaming the weak economy because inflation is too far off target. Getting inflation back to 2% is Powell’s number one priority — unless credit markets stop functioning. However, if credit markets collapse, another round of universal basic income and quantitative easing could be deployed again, and the wounds of record high inflation have not even begun to heal. This could ultimately be devastating to our currency and debt markets. In other words, the Fed does not have a path without pain. A dovish turn may not drive all asset prices as high as it has in the past, as stubborn stagflation is the prominent risk, and in fact the most likely outcome – a negative for most stocks.

Powell is long overdue to resign.

In response to an impending recession, the Federal Reserve, Treasury and Washington, D.C. are expected to coordinate the monetization of trillions of helicopter funds. However, if you believe this will solve all your problems, think twice. Just imagine the consequences of turning to massive inflationary policy while the sting of inflation instability still lingers in the minds of consumers and investors. Inflation in the U.S. is now at an all-time high, and it has also experienced a massive bull market in the U.S. dollar over the past year. But just imagine how devastating inflation will become once the Fed’s balance sheet exceeds $10 trillion and then rushes toward 100% of GDP; there’s no end in sight. At the same time, the collapse of the dollar — not only for goods and services, as is happening now, but also for our major trading partners — caused import prices to soar.

All in all, the bear market has a lot to go, the Fed’s pivot is still months away, and a shift to more dovish policy won’t solve all economic and market problems. In fact, it will make them worse. This is why buying and holding a typical 60/40 portfolio no longer works. And why inflation/deflation investing strategies become increasingly important for successful investing in each boom/bust cycle.

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Editor’s Note: The summary bullet for this article was chosen by Seeking Alpha editors.