Why this strategist says there's still one last hurrah for the stock market before it falters

Yahoo

02-04-2025

The new year has not quite shaped up as some investors had hoped, though we are only one — albeit ugly — quarter into it.
With the S&P 500 SPX closing out its worst three-month period since late 2022, some investors might be considering dip-buying opportunities, that is, if they can push through a murky tariff landscape.
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There's encouragement for dip buyers in our call of the day from TheDowTheory.com investment newsletter editor Manuel Blay, who sees one last whoop coming from stocks before the bears settle in.
The market-timing newsletter says it has steered clients correctly in the past, such as when to buy stocks in 2002, when to exit in 2007, re-enter in early 2009 and stay invested up to 2018.
Before we get to the whoop, Blay flags trouble down the road for stocks via the 3-month Treasury bill BX:TMUBMUSD03M/ 10-year Treasury note BX:TMUBMUSD10Y yield curve, which inverted in late February.
A yield curve inversion occurs when short-term rates move above long-term rates. Since the Feb. 26 inversion, it has seen several un-inversions and reinversions, when the yield curve returns to its normal upward slope.
Over history, those inversions 'have been among the most reliable warning signs for bear markets and recessions,' Blay explains in a new letter to clients. The exception to this was the October 2022 inversion, the first since 1990 that didn't lead immediately lead to either scenario, he adds.
While that's proof no indicator is perfect and price action remains crucial, he says inversions are a still sign that 'something is off beneath the surface. Normally, investors expect higher returns for long-term bonds. When short-term rates rise above long-term ones, it often reflects weak growth expectations.'
Since 1990, it has taken an average 6.3 months for a bear market to arrive after an inversion and 13.6 months for a recession, says Blay. But this time around, he notes investors are not just facing the inversion that started Feb. 26, but fallout from a recent un-inversion.
He said history shows those un-inversions 'have often led to substantial market declines,' and when those happen during bull markets, they often precede:
So while the October 2022 yield curve inversion didn't lead to a stock drop 'maybe it's the second knock — the inversion that began on 2/26/25 — that breaks the bull's back,' says Blay.
As for when that bearish action might begin following an un-inversion during a bull market, history shows the market has rallied an average 10.92% over 263 days before the start of a downturn, he says. 'This suggests there may still be one last 'hurrah' for the bulls — before the market eventually succumbs to stronger bearish forces.'
Blay offers a few reasons why he's expecting stocks to rise into midyear. Those include: beaten-down sentiment in which even a modest shift could trigger a rally; improving liquidity; and no historical precedent for a recession happening when sentiment and consumer surveys are negative, but hard economic indicators are positive.
Also , the financial sector exchange-traded fund XLF is still outperforming the S&P 500 ETF SPY, which is not what one would expect if a recession is looming. 'Healthy financials suggest that the dire implications of the inverted yield curve can be put aside, at least for the next few months,' he says.
U.S. stocks DJIA SPX COMP have opened lower, with Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y dropping, and gold GC00 tapping another record after its best quarter in decades.
Key asset performance
Last
5d
1m
YTD
1y
S&P 500
5611.85
-2.70%
-4.07%
-4.59%
7.02%
Nasdaq Composite
17,299.29
-4.89%
-5.73%
-10.42%
5.50%
10-year Treasury
4.203
-11.80
-4.50
-37.30
-15.80
Gold
3171.8
5.11%
9.22%
20.18%
39.57%
Oil
71.65
3.60%
4.64%
-0.31%
-14.69%
Data: MarketWatch. Treasury yields change expressed in basis points
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