This past weekend, we expressed to our followers that one of the tell-tale signs of a market bottom is when central banks START to panic (here). Our message was well received, so we wanted to follow up with some additional thoughts, especially on the back of some Draconian measures from 2 central banks since our Saturday post.
The BoJ and BoE both stepped into the market to defend their currency (BoJ) and bond markets (BoE). The chart below portrays the 30-year gilts recently turning parabolic. The BoE simply wouldn’t let their bond yields go to the moon. No one expected the BoE to reengineer QE, but such is unpredictable when dealing with soaring inflation, currency wars, and skyrocketing yields.
Other signposts of capitulation to watch:
- a full-blown earnings recession
- the highest quality large cap stocks collapse
- a Fed acknowledgment that forward looking inflation indicators have fallen (the irony here is that most of them have fallen significantly, i.e., money supply, gasoline, timber, housing market, etc.). Look at the dollar: it is at a 20 year high. There are a multitude of signs showing that inflation on the margin is declining. What is the Fed looking at!
Regarding which high quality stocks to potentially watch, Apple was one of the market’s darlings through this past market cycle. It checks all the boxes: everyone understands its business; it is a high quality stock; it produces significant free cash flow; and it was never grossly expensive throughout the previous cycle. How could you berate a Portfolio Manager for owning such a high quality stock?
However, based on our tenured investing careers, we know that bear markets don’t end until the grizzly mauls stocks in every corner of the market. If Apple were to significantly decline, that could be a sign that this bear market is nearly complete: a healthy sign. We need this bear market to end; this downturn which began in February 2021 (when speculative tech stocks peaked) is getting long in the tooth for many.
Yesterday, the S&P 500 was up 1.9% while Apple was down 1.3%. This is a rare performance differential given that Apple is a top stock in the index.
If you are looking for green shoots, yesterday’s market rally, Apple’s decline, and 2 major central banks implementing Draconian measures are all constructive steps toward the return of these grizzly bears to hibernation.
Astoria will be hosting our initial market outlook call in a couple of weeks. Keep an eye out for more details soon to come.
You can view the fact sheets of our strategies on the Strategies of our site.