Case for stocks is seen in the model showing economic bottom is past

New York: US stocks have defied skeptics and rallied this year in the face of bank collapses, continuous fears of a recession and what’s expected to be the gloomiest stretch for corporate profits in years. One potential explanation for why this is happening is things may not be as bad as they seem. In fact, according to a Bloomberg Intelligence model known as the Economic Regime Index, the worst of America’s economic pain appears to have happened months ago.

The index analyzes monthly changes in key inputs that factor into calling a recession, including capacity utilization, jobless claims, manufacturing and sentiment. It indicates that an economic downturn possibly started in June and bottomed in December. While the model still signals weakness in the economy, as long as it stays above its late-2022 lows the outlook is favorable for the S&P 500 Index, BI says.

“This can be contentious as far as spurring debate on whether we’re in a recession, headed for one or were already in one,” said Gillian Wolff of BI. “The macro landscape seems to have reached its worst place at the end of 2022, so there will likely be significant support for stocks as a result going forward.” Looking at the recessions since 1970, the S&P 500 returns 8.9% on average over the three months after BI’s model hits its low – and 20% over the 12 months after that nadir.

The broad equities benchmark is up 7.8% this year.

Investors are growing increasingly confident that the Federal Reserve will at some point this year end the cycle of interest-rate hikes that spurred the S&P 500’s 19% plunge in 2022, its worst performance since 2008.

“Fighting the Fed” has been a winning strategy for months, with stocks rising as the central bank lifted its benchmark rate to the highest since 2007. The S&P is heading toward a 20% advance from its October bottom, a threshold many investors define as the start of a bull market. Not only that, but the VIX Index – known as the market’s fear gauge – is at its lowest since January 2022, and put-to-call ratios are falling, meaning there’s reduced appetite for hedging against losses.