A year ago, almost all analysts were bullish on the outlook for stock markets in 2022. People who followed them could have lost a lot of money. But our new pH Report Sentiment Index gave a different view, as the chart shows.
First launched a year ago, we noted here in January that (as the first yellow arrows shows):
“It is suggesting a major downturn may be underway.”
And as I then noted in June:
“It has correctly signalled a downturn since its December launch, just ahead of the S&P 500’s final peak at 4800 versus 3700 today. It is still negative today.”
The problem, as noted here many times, is that stock markets have lost their core role of price discovery. As Bloomberg’s senior editor John Authers noted last week:
“For a quarter of a century now, investors have worked on the assumption that the Fed (and other central banks) lack the nerve to press ahead with tight policy if it hurt asset prices.
“It’s not an unreasonable belief, as the central bank has caved to market pressures at every time of asking.
Authers notes that this new strategy began with “its epochal decision to rescue Long-Term Capital Management in 1998. It cut rates to help the market regain its feet.”
And the Fed and other central banks continued to support the market every time it began to slide.
- At first, they just cut interest rates. But soon, this was no longer enough
- As the chart shows, they then began major stimulus programmes worth $tns every year
- In China, the government essentially panicked after 2008 and launched “subprime on steroids”
2022, however, as the Sentiment Index has warned, these bubbles in stocks, housing, crypto and other asset markets have begun to burst. Millions of people who trusted the central bankers have already lost a vast amount of money.
Being right isn’t, of course, a qualification for being a market analyst. So most of the people who told us we were wrong, and “didn’t know what we were talking about”, are still doing the same job.
They said the same when we correctly forecast the 2008 crash.
And recent days have seen them busy pumping out their optimistic forecasts for 2023. Our False Dawns chart has therefore been a very useful companion to the Index.
It highlights the close parallels with the post-1929 and 2000 downturns. These were the only 2 markets which had rivalled 2021 in terms of Prof Robert Shiller’s CAPE (Cyclically Adjusted Price Earnings) ratio.
It was my Chart of the Year in 2020, when markets were coming to the end of their 20-year bull run. As I noted then:
“At some point, the Fed will realise it cannot challenge 150 years of S&P history.
“Rule No 1 of famous market guru, Bob Farrell, is that “Markets tend to return to the mean over time”. And today the CAPE (Cyclically Adjusted Price/Earnings) Index, is even above 1929’s level.”
Nobody knows how markets will develop. But past performance is the best guide that we have. This is why our Sentiment Index is my Chart of the year for 2022.