Following up on the last thread regarding sector returns during periods of inflation: Here is the energy sector relative return during the four inflation regimes (1942-50, 1965-80, 1987-92, 2003-08): (THREAD)
And here is the retail industry group (GIC2). Consumer stocks can do OK at the start of an inflation wave, but apparently the lack of pricing power eventually takes over. /2
Next, the healthcare-equipment industry group. Huge winner during the 1940s, and did well during the 1960s and early '70s also—perhaps because both were war periods? Big pharma stocks were part of the Nifty Fifty, which carried the market into its peak in 1973. /3
And here is the financial sector. More of a mixed bag than the correlations suggest. They did OK during the 1940s and '60s, but were at the center of the storm during the S&L crisis in 1990 and again during the financial crisis in 2008. /4
Looking at the inflation regimes in a different way, the next chart shows the 2003-2008 wave, which as we all remember, ended in 2008 with a spectacular commodity boom. /5
On the left, in the chart above, is the distribution of the inflation rate since 1926 with the 2003-08 period highlighted. On the right, a scatter plot of the correlation and relative return for the 24 GIC2-level industry groups. /6
As you can see, commodity-sensitive stocks are up and to the right, and consumer and financial stocks are down and to the left. /7
And below is the 1965-1980 period. A similar story for sector relative returns, even though this regime lasted much longer and produced much higher inflation. /END

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More from @TimmerFidelity

Jun 25
Is our long secular bull dead? Here's a way to gauge recovery (or failure to recover): Separate all cyclical bear markets into two categories: ones for which the 36-month Z-score (de-trended cycle) remains positive, and the ones for which they get more negative. 🧵
The chart above shows all cyclical bear markets within secular bull markets. Note how the Z-score doesn’t get any worse from current levels. It stays above zero and recovers. /2
The chart below shows all the cyclical bear markets within secular bear markets. Note how they all get worse from here. They go below zero and keep going. /3
Read 5 tweets
Jun 25
Bear markets and recessions happen during all secular regimes, but during secular bull markets they tend to be shorter and are quicker to recover. 🧵
If the current bear market is ending (not a prediction but just an assumption for this exercise), then as the chart above shows, we are still in line with the behavior of secular bull markets. /2
But, for the analog to hold, the recovery from this bear market needs to be swift. If the lows are in (or near), but the market languishes for a long time (along the lines of the 1946-1947 cycle), that would NOT be consistent with a secular bull market. /3
Read 10 tweets
Jun 24
We are in bear territory at the moment. But are we still in a secular bull market? This question has been gnawing at me for weeks now. 🧵
I have been a fervent secular bull since the spring of 2013 (when the SPX finally made a new all-time high following the dot-com bubble and the GFC), and it has been the right call so far. /2
But, it behooves us all to continuously question our assumptions, so that those assumptions don’t turn into dogmas. /3
Read 4 tweets
Jun 23
Market breadth suggests that earnings estimates may see more downgrades than upgrades in the coming months. The chart below shows the percentage of stocks above their 200-day moving average plotted against the revisions index (upgrades as a % of all revisions) h/t @macrobond 🧵 Image
There is definitely some correlation here, although it’s not perfect. The revisions index seems too high for where breadth is. /2
The next chart shows another take on this. This is a weekly series that compares the percentage of industry groups with rising estimates to the aforementioned breadth number. /3 Image
Read 4 tweets
Jun 22
Damage assessment: Here we see the % of stocks above their 50-day moving average, by sector. The table shows the readings at various market highs and lows. Not pretty. Most sectors are now on par with the March 2020 extreme. 🧵
Even the energy sector is at only 10% (it was 95% at the previous low), illustrating that the selling always becomes indiscriminate during the capitulation phase. /2
All of this tells me that—technically speaking—we have reached the minimum threshold of oversold conditions to qualify as a bottom. /3
Read 4 tweets
Jun 15
Is the '60s flashback ending? I have often compared the current regime to the late 1960s, and have shown the analog below a number of times to highlight that similarity. 🧵 Image
But, after the past few inflation reports, it is clear that the current regime shift is happening a lot faster than six decades ago. It raises important questions about the secular context. /2
The secular outlook remains unclear at this point, but what is clear is that the correlations are changing, just like they were back then. /3
Read 6 tweets

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