Indicators suggest the market likely hasn’t hit bottom yet

When your background is in macroeconomic and market strategy, there’s an unstated expectation that you can opine on everything. For example, I wasn’t a microbiologist in 2020 during the COVID-19 pandemic, although I often felt like I was struggling to play one on television. In much the same way, I’m not a military strategist today — nor an expert on the inner thinking of US President Trump, Israeli Prime Minister Netanyahu, or Iranian Ayatollah Mojtaba Khomeini. It’s probably for the best. When you convince yourself that you understand the motivations and goals of political and military leaders, markets would likely have a way of humbling you quickly.

This past week was a reminder. At various points, markets signaled that the war was intensifying, then nearing an end, and intensifying again.¹ Trying to trade in reaction to each headline is a recipe for being whipsawed. In periods like this, we come back to what we do best. We focus on interpreting what markets themselves are telling us.

Business cycle indicators have shown only gradual deterioration

Let’s start with the business cycle. As we’ve been saying, our preferred cyclical indicators are trending in the wrong direction, but they aren’t pointing to disaster. Credit spreads have modestly widened,² inflation expectations have trended higher,³ and the US dollar has modestly strengthened.⁴ The rise in inflation expectations has led investors to expect further rate increases from the European Central Bank, the Bank of England, and even the Bank of Japan.⁵

Taken together, this gradual — but not meaningful — deterioration in cycle indicators suggests that markets still appear to believe in an exit ramp and an eventual resumption of the expansion once near-term uncertainty fades.

Global signals point toward a slowdown

Tactically, the picture has softened. Our short-lived global expansion signal has shifted toward a slowdown. Risk sentiment has been deteriorating,⁶ and while many leading indicators remained relatively stable,⁷ they may follow sentiment and confidence and deteriorate. We saw early evidence of that last week. Consumer sentiment weakened,⁸ and the Institute of Supply Management (ISM) services activity moderated.⁹ They weren’t recessionary readings, but momentum had faded.

Has the market bottomed? Probably not.

That brings us to the weeks ahead and the question that many investors are asking. The major stock indexes have already corrected. The Dow Jones Industrial Average has fallen roughly 10%.¹⁰ The S&P 500 Index isn’t far behind.¹¹ The MSCI All Country World (ACWI) ex USA Index is down more than 11%.¹² Has the market already found its bottom? Based on our preferred market bottom indicators, the answer for now is likely no.

• Sentiment has become less bullish, but it hasn’t reached the extremes typically associated with durable bottoms. The American Association of Individual Investors’ (AAII) Sentiment Survey showed bears outnumbering bulls by about 20 percentage points. At prior market lows, that gap has often been closer to 50.¹³
• Volatility has increased, but it hasn’t surged to levels that have typically coincided with panic. The VIX, for example, hasn’t approached 40.¹⁴
• Technicals also continued to deteriorate. The S&P 500 Index fell below its 200-day moving average, which may be an early warning rather than an all-clear signal. During the 2022 market bottom, it ultimately traded 16% below that level before finding a more solid footing.¹⁵

Of course, none of that’ll matter if there’s a social media post today calling off the war. But again, who am I to know?

What does this mean for investors?

I may still occasionally find myself playing a military strategist on television, but in practice, I remain grounded in what the market itself is signaling. In the short term, markets may still have work to do before a durable bottom is formed. Tactically, I believe a slowdown environment argues for maintaining stock exposure, but with greater emphasis on quality and more defensive areas of the market. Longer term, we may want to take solace in markets indicating that the broader cycle hasn’t yet ended and that this too shall pass.