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Priced In

Updated: Jul 20, 2023

The percentage of NYSE stocks above their 200-day average peaked at 82% last week, its highest tally since May 2013. Small stocks have to participate for an improvement in market breadth to occur, and according to technician Jon Krinsky at Baycrest Partners, 83% of the Russell 3000 names got back above their 200-day moving averages last week-- that’s a record that goes back seven years to 2013. It definitely wasn’t bearish then and it’s unlikely to be bearish now.

In fact, we see this as a high-conviction signal that leads us to expect additional S&P 500 gains. The S&P typically posts stronger returns when there are more stocks participating, and participation usually peaks ahead of the market. For example, the S&P rallied another 45% between the 2013 breadth surge and 2015 price peak, and another 35% between the 2016 breadth surge and 2018 price peak. Since 1994, the highest count recorded was 94% in Sept. 2009.

So, market technicians are fired up. Economists aren’t quite as enthused.

JPMorgan Chase & Co. analysts are forecasting a U.S. economic contraction next quarter as various states impose restrictions on businesses and activity amid a record surge in Covid-19 cases. In their 2021 U.S. outlook issued Friday, they forecasted our economy to shrink at a 1% annualized pace in the January-to-March period.

JPMorgan isn’t alone in its forecast, either. Bloomberg Economics expects gross domestic product to contract at a 0.5% annualized pace in the first quarter, and Moody’s Analytics predicted that the economy would shrink during both the first and second quarters of 2021 and that the unemployment rate would approach 10 percent next summer, up from 6.9 percent last month.

The reason we look to market technicals is frequently to corroborate what we see fundamentally, and this looks like a case of the market already pricing in those expectations for an early 2021 economic slowdown. We feel like the global acceleration in the economy and in earnings should continue to support equities well into next year, and we expect the US will recover to pre-pandemic levels by mid-2021 and Europe in 2022.

At the cusp of a potential multi-year bull market, risk assets are still most attractive to us – although we continue to recommend strategic discipline for navigating episodic volatility.

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