Sorry, but We Just Don't See the Latest Rally as the Start of a New Bull Market
U.S. futures point to a strong open here on Tuesday morning as stocks look to continue the latest market rally. The potential duration of this latest move higher will hinge on several factors, including how the growing number of earnings reports and forward guidance compare to consensus expectations.
In recent months, the market has experienced several bear market rallies, and given the number of headwinds confronting the market and the economy, the likely probability is that we have not left the bear market behind as yet. As we've shared with members, the futures curve has priced in a 93.9% chance of the Fed raising rates another 75 basis points at its next meeting and it is forecasting rates at around 5% by February 2023.
While we could consider this recent rally to be of the short covering variety, some will insist on it being the new leg of a bull market. That just is not the case, but certainly an oversold condition can cause the market to rise sharply and deliver hope to the bulls one more time.
Short covering is simply a process that can take days or even weeks to unwind. That started last Thursday and seems to be continuing, at least for now. As earnings season rambles on, the challenge is trying to pick between the winners and losers. Money is flowing into the markets, so we wait and watch for the next signal.
In our view, the stock market has yet to price in this growing reality and its implications even though we are seeing calls increase for a recession in 2023. A Bloomberg survey of 42 economists predicts the probability of a recession over the next 12 months now stands at 60%, up from 50% a month earlier. And The Wall Street Journal's latest survey of economists puts the probability of a recession in the next 12 months at 63%, up from 49% in the July survey.
The drivers behind those rising probabilities are the ones that we've shared with members in recent weeks, and they are the ones that have kept us on the cautious path with the portfolio. We recapped those concerns on yesterday's AAP Podcast and discussed why, in our view, the consensus forecast for S&P 500 earnings to grow 7.6% in 2023 vs. 2022 looks questionable. As we move through the September quarter earnings season, we are likely to see S&P 500 earnings expectations for this year and next year continue to move lower, pushing back on the argument about the market's cheapness. As the stock market travels to this realization, we expect market volatility to continue, leading us to keep our inverse ETFs in play while we strategically put some of the portfolio's cash to work using our current shopping list.