The Bear Market Hasn't Even Begun

Or why sentiment is still extremely bullish.

Yahoo: Investor fears set the table for an 'echo bubble' down the road

"I think sentiment is starting to set up as a contrarian movement with [the latest University of Michigan survey data] added to it," Sonders said, referencing her earlier tweet noting consumer expectations for stock prices are at a six-year low.

"I think [on] the behavioral side — what investors are actually doing — we're not quite there yet," Sonders adds.

Separately, a growing chorus of Wall Street analysts and traders are the sounding alarm bells on a final bear market capitulation. By implication, this means all rallies are suspect until the air clears. That may take time, as the Fed isn't likely to blink for at least a couple meetings.

On the flip side, not everyone is bearish and holding out for a final washout. Yves Lamoureux, president of Lamoureux & Co., maintains his longer-term bullish thesis for stocks into 2025.

"To me the price bottom is in. I do not expect another low in indices. The new bull market begins in earnest amid the chaos and massive panic as usual," he wrote to Yahoo Finance in a note.

Lamoureux sticks by his thesis that the 40-year trend lower in interest rates is not over — and that there will be a new deflationary scare. This will force the Fed to pivot as the economy slows, with lower rates inciting a new tech bubble trade. Or so goes the theory.

"If correct, we will see a dramatic shift of fear to FOMO, especially in tech stocks," Lamoureux writes. "They're long duration assets and they'll rally hard once market participants see rates trending lower. The tech rally will be an 'echo bubble' of the previous recent one."

Perhaps not a market for the herd to fear, after all.

Lamoureux's framework is logical. He's saying this is another correction within the 2009-??? bull market and that the conditions that produced the deep corrections of 2011, 2015, 2018 and 20202 are still operating. None of those were bear markets though, and neither is this correction if the low is in.

I think this time is different is because there has been no spike in the VIX despite five months of stock price declines. All the corrections since 2009 were sharp and swift. This one is more slow and plodding despite a few shocks. 

I also see investor complacency everywhere. I cannot say with 100 percent certainty that a bear market is underway because I do not know the future, but I can say with 100 percent certainty that the behavior of investors is 100 percent primed for a bear market. There has been no major rush for the exits. Most investors are sitting put and thinking this is another dip in the mold Lamoureux discusses. Maybe they get right one more time, who knows? 

Conditions have changed though: inflation is much higher than in any prior correction. There is no VIX capitulation spike, the put/call ratio remains elevated but with no spike, sentiment is increasingly bearish, but still extremely bullish on a long-term time frame.

I do think the inflation panic is overdone right here, but if I'm wrong about that, higher inflation will crater the market in the months ahead. The bigger risk is what I think is the more plausible bear scenario: inflation stays relatively high. Everyone looking for a Fed pause, pivot or return to 2009-2021 policy is assuming consumer inflation goes all the way back to 2 percent CPI. To get there will take a major deflationary event that sinks stocks. Without that, and without the CPI sliding much lower, inflation will settle higher than anticipated. Wage inflation will start breaking out as more workers demand double-digit pay increases to cover the multi-year rise in prices.

Bulls need inflation to collapse. They need inflation to collapse for a good reason, not a bad reason like a financial market panic, because stocks go down in that scenario. I don't see stocks going on to new highs or even going much higher at all with the S&P 500 Index already at 4120 as I'm typing.