some discomfort is normal but call me if the pain gets bad the doctor will say leaving it up to the patient to determine the line between the tolerable and the worrisome investors in the five months since stocks peaked have mostly been feeling a typical degree of discomfort for the procedure the economy and markets are undergoing pricing in an inflationary squeeze the start of a financialtightening cycle decelerating growth and a resulting valuation reset its not yet clear whether all this will break through to acute suffering and more lasting impairment of asset values with several key macroeconomic factors nominal and real bond yields earnings downgrades and oil prices still short of wall streets apparent pain threshold last weeks market action the s  p 500 slipping 12 in choppy indecisive trading retaining most of the 9 ramp from the may 20 low while declining plenty of decent excuses to break down further fits well into this category of routine discomfort its fair to observe that skepticism prevails as to whether the index low two weeks ago just above 3800 was a reliable trough and with good reason previous rallies this year have been brief interludes before further new lows the longerterm downtrend remains in place and its difficult to see anything like an all clear signal for risktaking soon given the federal reserves singular focus on hustling rates higher to fight an inflationary trend which even if it has peaked cant prove that notion for another few months still the markets slippage last week does nothing to hurt the case that the recent rebound is fairly wellsupported and could continue higher to test the nerve of the nowconfident camp insisting that all rallies should be sold bottom or bear bounce the lopsided positivemarketbreadth statistics from the initial threeday ramp off the lows triggered some signals that tend to have pretty good longterm implications for returns several months to a year out with the huge exceptions being the multiyear recessionary bear markets starting in 2000 and 2007 stocks remain pretty well in tune with other asset classes too the s  p 500 is within half a percent of where it stood four weeks ago and the 2 and 10year treasury yields junkbond spreads and fullyear 2022 s  p 500 earnings forecasts are likewise all in pretty much the same place now as they were then a model used by fidelity macro strategist jurrien timmer to gauge fair value for stocks based on the 2year treasury yield as a proxy for the feds likely policy path explains most of equities valuation compression this year the slope tracks well though stocks remain a bit above the implied proper values timmer believes that because the years pe decline has merely taken it to the range of fair rather than cheap upside is likely limited even if fundamentals should offer good support at the recent lows a market experiencing unease and bracing against the known headwinds yet not yet forced to price in truly painful potential outcomes – this is the theme of the moment deutsche bank strategists who track the investment stance of all categories of investors on friday reported that while a slowdown in growth looks priced in across the board very few positioning indicators are down to recession levels this makes sense incidentally given that last weeks jobs report and ism manufacturing survey showed nothing approaching recessionary conditions hedge funds have radically cut back on equity risk and rampant calloption buying of the past few years has largely receded yet short interest is low and households continue to carry elevated stock allocations relative to history watch the profit outlook the real pain point for stocks would obviously be the profit outlook giving way just as valuations have begun to look pretty palatable based on current earnings forecasts kkr  co chief investment officer henry mcvey says he believes the market is now transitioning from a mode where inflation is the main preoccupation to earnings expectations getting cut significantly over the second half and into 2024 morgan stanley notes the breadth of earnings revisions the net percentage being raised versus cut looks about to flip negative not great but the s  p 500 annualreturn path shows this isnt exactly news to the market and there have been times when this gauge cracked below zero in a midcycle slowdown rather than recession with fed officials last week consistently waving investors away from the hope that they will be looking for an opportunity to pause their ratehiking campaign in coming months yields would seem to be one of the more obvious things that could test stocks pain threshold watch rates oil the 10year yield has climbed back to the doorstep of 3 not far below the peak above 31 it hit briefly in early may which itself was just short of the 325 level reached in late 2018 which helped trigger a rapid stockmarket tumble into late december that year a break above this zone also represents a breach of the multidecade downtrend in yields so such a move would not go unnoticed real rates yields adjusted for marketimplied inflation expectations are another thing to watch on the hunt for sources of possible pain the real yield has recently turned positive again when it got to 1 in 2013 it coincided with the attentiongetting but ultimately benign taper tantrum the same level in late 2018 later in the cycle and with stocks more expensive proved tougher to digest for stocks which had a near20 setback that ended as the fed signaled a pause to its tightening efforts for sure oil ramping above the march warpanic peak of 130 a barrel for wti crude from 120 now would be an obvious additional challenge too though it remains a lessonerous burden now than it was from 20112014 adjusted for the larger size and lower energyintensity of todays economy its fair to sum up by saying there is no shortage of potential sources of pain yet markets have absorbed plenty of unpleasantness already and have not decisively broken down in large part because investors collectively have been fearful and flinching for months now anticipating pain rather than chasing pleasure