Author: Kenley Scott

Key Points:

• This week, CPI data should be a key tell for the next direction in the market.
• Of the last eight releases, it has come in above estimates seven times.
  • Average day-of change is -1% for those 7.
  • Average forward four-week gain is -2% after all eight releases. Max four-week average gain is 2%, max average loss is -7%.
• It stands to reason that winners since CPI became a major issue would continue to do well should the figure come in hot again (Oil & Gas, Food/Beverage, Utility, Discount Retail, Diversified Medical).
• Should it miss finally, major losers (Software, Semis, Apparel, Autos, Leisure Service) could see the most significant bounces.

Key Points:

• The S&P 500 had its second-worst first half and third-worst semiannual period of the last 53 years, surpassed only by a 21% drop in H1 1970 and a 29% drop in H2 2008. In Q2, the 16% drop was the second-worst Q2 and the seventh-worst quarter since 1970.
• The Nasdaq Composite just had its worst first half and its third-worst semiannual period in its 52-year history, surpassed by a 38% drop in H2 2000 and a 31% drop in H2 2008. In Q2, the 22% drop was the worst Q2 and the eighth-worst quarter ever.
• Consumer Cyclical dropped nearly 40%, in the fourth-worst quarter for any sector since 1970.
• First halves in second years of presidencies are typically weak, and this year was exaggerated. Q3 is also typically weak, however, Q4 averages a ~+5% gain (S&P 500).

Key Points:

• S&P 500, Nasdaq, and Russell 2000, all had follow-through days on Friday.
• We generally consider this the fifth attempt at a new uptrend; the prior four have failed (Nasdaq with four failed FTDs, although S&P and Russell with three each).
• S&P 500 history has an average of ~6 failed rallies/FTDs throughout extended bear markets (excluding 2020 and 1987, which had none).
  • Average bear rally is 12%, and average gain after the FTD is 5%.

Key Points:

• Highest inflation in over 40 years, with 8.6% y/y acceleration in May.
• Historically, discount rate has risen to nearly the same magnitude as inflation, with a slight lag. This time, arguably, it is the furthest behind the curve ever.
• The prior period of highest inflation was from 1970 to 1982, when it ranged from a low of 3% to a high of 14% and averaged about 7.5% (y/y) over the 156 months.
  • That period contained three bear markets (1973–74, 1976–78, and 1980–82), the worst of which was the first (-50% on the S&P 500) and during the first major inflation spike.
  • High inflation did not always signal a bad market, but high inflation and the Fed behind the curve were among the most challenged. Later on, the final bear market of the period occurred when inflation was peaking, but the Fed was arguably late in cutting rates.