S&P 3840 Next Month? 2018 Says Yes

I’m not a fan of visual analogues in the market context. They’re (almost) always “chart crimes.”

Typically, it’s an exercise in goal seeking. In 2015, when China’s margin-fueled equity bubble was busy imploding, I remember asking “the chart guy” for an overlay showing the Shanghai Composite with US tech in the lead up to the dot-com crash. I didn’t care whether the comparison was valid. I just wanted the eye candy.

He didn’t disappoint. “You’re gonna love this,” he said, in an internal chat, after interrogating the data and torturing the axes to make it work. I imagine he’s still doing the same thing all these years later — an affable soul with chronic back pain, tethered to a terminal with invisible handcuffs, doomed to churn out the same charts for the same boss in perpetuity.

Once I was begrudgingly compelled to make my own charts (for myself, thankfully, not for “the man”) I discovered two things. First, the “chart guy” wasn’t all that great at creating charts. And second, you can make just about anything into an analogue.

“Our experience with such analogues is that they eventually break down as the past is never a perfect prologue,” Morgan Stanley’s Mike Wilson wrote, in his latest, referring to the ostensibly frightening visual (below).

With all of the caveats above, there are a number of interesting things we can say about this particular example of forcing the present to rhyme with the past.

For one thing, it’s very possible that a de-escalation in eastern Europe could lead to a relief rally in the very near future, which would create an almost comically similar spike to that shown in the figure (see Wilson’s annotation). Of course, that would be pure coincidence.

More compelling is the idea that market participants (and Jerome Powell) may be partially wrong to insist on the differences between “this time” and “last time,” or at least when “last time” means 2018. Generally speaking, the narrative goes something like this. Although the US economy and corporate profits were holding up well in 2018, the rest of the world was decelerating as Fed hikes weighed on emerging markets and the trade war undermined global growth. The Fed was thus tightening into a slowdown, with muted inflation and ahead of a guaranteed deceleration in corporate profits as the sugar high from the Trump tax cuts faded. Now, by contrast, inflation is red-hot, the economy is booming and corporate profits will likely hold up. Or so we’re told.

But what if 2022 is more like 2018 than we think? Wilson explored that question. “The most apparent similarity is that we have an overly hawkish Fed at a time when growth is slowing,” he wrote. Wilson conceded that it’s “hard to argue the Fed is making a mistake by signaling such an aggressive tightening schedule” considering where inflation is, but suggested the Committee’s aggressive stance “could mean they really are on ‘auto pilot’ this time and therefore may find it very difficult to pivot back.” That, in turn, raises the odds that “we end up with a similar outcome as December 2018,” he remarked.

And therein lies the justification for the visual (above). The implication, as Wilson’s second annotation notes, is that the S&P ends up at 3,840 by the end of next month. That would be supremely ironic, considering the 2018 trough came just after the final Fed hike of the last cycle, while a hypothetical March trough would coincide with the first hike of the new cycle.