The Weekly Wire: Twin Peaks? | Orion
The article draws a parallel between the cult TV show Twin Peaks and the current financial landscape, suggesting that the U.S. stock market may be approaching two critical "peaks"—peak inflation, indicated by a slight decline in the April CPI after months of increases, and peak investor pessimism, evidenced by historically high bearish sentiment—which together could signal a more positive market outlook for the latter half of 2022 despite recent challenges.
Some of us recall David Lynch’s groundbreaking television series Twin Peaks, which premiered on ABC on April 8, 1990, and ran for two seasons until its cancellation in 1991. Though the series was short-lived, it has achieved cult-like status due to its innovative mix of mystery, horror, the supernatural, and its cast of famously eccentric characters. While it’s hard for me to recall much in the way of specifics about the series 30 years after the fact, I am pleased I didn’t have to go all the way back to the 1980s for a pop culture tie-in for this week’s Weekly Wire.
The reason we are turning to Twin Peaks this week is that we just might be at two peaks that could bode well for US equities through the back half of 2022, and those potential peaks are peak inflation and peak investor pessimism. As it concerns the former, we learned last week that the CPI in April was up 8.3%, a still historically high reading but down from the 8.5% reading in March, and the first month-to-month decline for the CPI in eight months. As it concerns the latter, the late April AAII Sentiment Survey showed the greatest percentage of individual investors as being bearish on stocks since 2009 (see chart). Since sentiment is considered a contrarian indicator, peak pessimism has historically been associated with higher prices for stocks on a go-forward basis (consider that the S&P 500 was up more than 20% in 2009). If inflation is peaking, it is likely the Fed won’t deviate from an expected 50 bps hike in the Fed Funds rate at its June meeting and at its July meeting, a dynamic that could calm investors concerned the Fed would have to move faster and farther on the rate hiking front to bring inflation under control.
It has been a very challenging year for stocks. That written, if we have seen peak inflation and peak investor pessimism the path forward for the market should be much more constructive.