The U.S. stock and bond markets are finally in the process of catching up with our views. We have always believed that the last two years have represented a false bullish market built on sand, not concrete.
And frankly, we also stand firm in the view that the fear of inflation will pass very soon: the bullish market is being extrapolated and hyperventilated by economists, strategists, experts and media outlets that seem unable to see beyond tips from their noses. The delayed effects of the supercharged US dollar DXY,
it is huge in terms of the impact on the cost of imported goods. Inventories have gone from deficient to excessive and will need to be corrected with price discounts.
Money supply growth has literally plummeted and there is no pulse on the money rate. Fiscal policy, over the course of a year, has gone from radical to radical
stimulus to restraint that would make the remnants of the Tea Party blush. The cyclical aspect of the bullish commodity market is in the rearview mirror. And because Federal Reserve Chairman Jay Powell is short-sighted focusing on “job vacancies,” a very soft data point, he is losing the momentum of layoffs and the withdrawal of companies’ hiring plans. Inflation will melt next year, and few (if any) are ready for it.
I feel like I’m reliving the summer of 2008. The stock market is following a family pattern of recessionary bear market. The first phase is the Fed-induced multiple P / E contraction. Typically, the first 20% reduction refers to how liquidity draining causes the multiple P / E to shrink, usually by four percentage points in this first delivery of the recessionary bear market.
This time, the compression has been five points multiple since the peak of early 2022. How perfect. Any recession in the economy necessarily implies a contraction in profits, which has not yet happened. Like I said, it’s all about the multiple. So far, that’s it. A recession in vanilla GDP, however mild or severe, causes corporate profits to fall by more than 20% from the peak.
This is the next shoe to fall off. It also means that once analysts begin to understand the reality and begin to shrink their numbers, investors who are putting their toes back on the market now because they believe valuations have improved “will be enough to face the its own reality that, no … depending on where the consensus on its future EPS estimates will be forced: the stock market is not as “cheap” as it seems at the moment.
No one can ring a bell on the tops or troughs. But there are well-established patterns to the bare minimum. On the one hand, the vision of the recession must become current. Analysts have to exceed their earnings projections downward. There are no market funds until the Fed has just tightened, and in a bearish recessionary market, unlike a liquidity-induced pullback (as of late 2018), policy flexibility is needed. real to set market lows. This is a considerable time. far.
Reads: What to expect when you expect Fed rate hikes to affect housing, stocks and other “safe” things
The US stock market also needs help from the Treasury market for “relative” valuation support. In the past, the end of a bearish equity market required an average drop of 135 basis points (1.35 percentage points) on the 10-year Treasury TMUBMUSD10Y.
performance. Before anyone can go higher with stocks, history shows that we need a big bond recovery first. Memory for asset combination equipment: This means less than 2%.
Also note that the dividend yield of the S&P 500 SPX,
it is an insignificant 1.5%: bear markets do not usually end until dividend yields converge on bond yields. This arithmetically means a minimum for the S&P 500 closer to 3,300. So the answer is no, we are not there yet.
David Rosenberg is president and founder of the research firm Rosenberg Research. Sign up for a free one-month trial on the Rosenberg Research website.
Month: This Wall Street legend has been in every bear market since the 1950’s. He says that whatever comes next could hit the S&P 500 with a 30% loss.
Month: “Fed always hurts” – this forecast sees maximum US inflation and stocks in a bearish summer market