Overtime

The Bear Case

Good morning,

This week, we’re looking at the bear case for equities. As I outlined in yesterday’s Playbook, I remain bullish on stocks, believe any pullback in the S&P 500 would likely be less than 10%, and see little reason to change our behavior or allocations.

But, the market is ever-changing and that doesn’t mean there aren’t risks. This week, I’ll outline what I believe is the most likely scenario to take the S&P deeper than a 10% correction and what charts and market internals will tell us we’re heading down that path.

Specifically, we’ll look at:

• Implications of higher short-term rates and the dollar

• Commodity strength

• Weaker consumer discretionary stocks

• and what a sellable bounce in stocks would look like

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Higher for longer

The narrative: Inflation isn’t dead

As I showed yesterday, headline inflation has stopped declining just above 3% using the year-over-year number. While the core number is more important, the headline tends to lead. Remember, if gas prices go up, inflation and inflation expectations go up and crude oil has broken out (see next section).

That means the Fed can’t cut

The odds of no cuts this year continue to rise because of the inflation dynamic and strong economy. Following yesterday’s retail sales report, the probability based on Fed funds future rose to 13.3%.

Rates have broken out across the board

A combination of inflationary pressures and a higher for longer Fed funds rate has pushed rates up across the board. 2s, 10s, and 30s have all broken out and are at their highest levels since November. While I still wouldn’t call it my base case, we cannot dismiss the possibility that we test the October highs.

A rising dollar is a negative for all risk assets