Has the Stock Market Bottomed?

Market underpinnings are holding up. | Income-Investing Picks for a RecessionIncome-Investing Picks for a Recession | Created for {EMAIL} | [Web Version]( August 1, 2022 CONNECT WITH KIPLINGER  [LinkedIn]( [Facebook]( [Twitter]( [Instagram ]( [Youtube]( [SIGN UP]( ⋅ [WEBSITE]( [] What's in the Works [] Has the Stock Market Bottomed? Market strategist Ed Yardeni is making the case that the stock market bottomed on June 16, at a level of 3,666.77. The broad-market benchmark is up 12.6% since then. “There are still some buying opportunities, but the market has had a nice rally,” Yardeni says. Signs that a bottom is in, according to Yardeni: The economy just isn’t that bad. “We’ve had data showing a slowdown, but not any meaningful recession scenario,” Yardeni says. That was confirmed by the most recent reading of the Purchasing Managers Index, released by the Institute of Supply Chain Management on August 1, he says. The PMI Index registered 52.8%, down from 53 in June and the lowest figure since June 2020. But the dip was less than expected, and a reading of 50 or above indicates that the manufacturing economy is expanding, not contracting. Recessions are typically associated with readings around 45 to 48, Yardeni says. “It doesn’t mean we can’t still have a recession, but this rally reflects the perception that even if it’s a technical recession it won’t be that bad.” Inflation might be peaking. Commodity prices have been easing since early June, and average hourly earnings are showing signs of moderation. The stock market wasn’t phased by a 9.1% jump in consumer prices for the year ended in June. The July Consumer Price Index, released on August 10, is likely to show moderation in food and energy costs, and also in the prices of durable goods such as appliances. “Rent inflation is going to be the problem,” Yardeni says. Don’t expect inflation to retreat to 2% any time soon, “but 4% to 5% is going to look pretty good in the second half of 2022. Next year, it could go down to 3% to 4% - and maybe that’s it for a while.” Federal Reserve rate hikes might soon be over. The strengthening of the U.S. dollar is roughly equivalent to a half-point hike, Yardeni figures. And quantitative tightening—the process by which the Fed reduces the size of its balance sheet by letting some of the bonds it holds mature without replacing them—might be worth another half-point. Short-term bond yields seem to be predicting one more half-point hike in September, says Yardeni, “and we kind of agree with that.” [LinkedIn]( [Twitter]( [Facebook]( [Email]( [Weed & Grass Killer Class Action]( If you purchased certain Roundup®, HDX®, or Ace® brand weed & grass killer products, you may be entitled to a cash payment from a proposed class action settlement. Visit the Settlement Website for a list of the eligible Products and to make a claim. [READ MORE]( ADVERTISEMENT [] Continued [] Market underpinnings are holding up. Negative sentiment, which works well as a market indicator, seemed to trough in June. Yes, analysts are cutting back corporate earnings estimates—but not by much. “Analysts didn’t get the recession memo,” Yardeni says. Look for estimated earnings growth to be basically flat for the rest of the year, and the market’s price-earnings ratio to hover close to where it is now—arguing for a range bound market for the rest of 2022, according to Yardeni, with no new high until closer to the end of 2023. And speaking of PMI, purchasing managers in manufacturing companies are reporting a gradual slowdown, but not a quick one. That may indicate a delay in the expected onset of recession. New orders are contracting, but production is still rising, on average, as manufacturers work through backlogs. About a third of manufacturers say that their customers’ inventories are still too low. While this is down from nearly half in May, it still indicates support for current levels of production. Production levels would be even higher, but a third of companies surveyed reported continuing labor shortages. While the slowdown is gradual, it is still a slowdown. Companies’ inventories of materials are growing at a fast rate as supply chain problems ease. Normally, this would be regarded as a good thing, but some companies are expressing concerns that they may have too much, given declining orders. Also, a good part of export order growth is demand for U.S. energy, given the shortages in Europe caused by the restriction in Russian supply. As European economies sputter this fall, non-energy U.S. exports to Europe are also likely to slow. 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