FIGURE 4: Forward One-Year Returns
FIGURE 5: SPX Index Price and Consumer Price Index Comparison
hibiting volatility not displayed since the 1981 recession. The last four recessions—2020, 2009, 2001 and 1990—were marked by swift recoveries after the model cleared the 0.2 level. Stocks like a momentum low in the economy, so the fact that our regime model is recovering from extreme troughs could continue to work in equity mar- kets’ favor. History shows that the highest S&P 500 returns occur after economic regime model drops below 0.2, as it did in October 2022. Since 1970, the S&P 500 returned 19.9% on aver- age in the year after the regime index dropped below 0.2. (See FIGURE 4.) Stocks’ struggles with infla-
tion may have peaked in 2022, but if a resumption of inflation pressure should emerge, it likely won’t be taken in stride by the equity market. The last time
BI Equity Strategy’s economic regime model is making a
volatile recovery, hitting its highest level since April 2022 after several months of dipping in and out of recession territory, but also clearing the way for equities to celebrate a momentum rebound. Using logistic regression and a refined set of just four inputs, our model measures U.S. economic momentum on a scale of 0 to 1, with a reading of 0 indicating the inputs are behaving as they have during previous recessions. The model dipped below 0.2, as it typically does in recessions, in October 2022, and after a brief recovery, sputtered again in –the second half of 2023, ex-
niri.org/ irupdate
inflation was as volatile as it is now was from 1968 to the early 1980s, when a series of supply shocks bullied prices. The Federal Reserve’s struggles to contain prices sparked
severe recessions through the period, much like some investors may fear could happen now. Troughout that period, major peaks in CPI corresponded with lows in equities and vice versa. Infla- tion turns might again be key to stock trends. (See FIGURE 5.) IR
Gina Martin Adams is Chief Equity Strategist at Bloomberg Intelligence;
gmartinadam1@bloomberg.net.
IR UPDAT E ■ SPRING 2 0 24 1 3
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