SPECIAL REPORT: Oct likely bottom, but catalyst remains Fed. What works remainder of 2023. Webinar today at 2pm ET
Reminder, tune in today for an important webinar.
View our presentation deck HERE.
We are publishing a special report today highlighting why we believe Oct 12, 2022 was the low for this bear market cycle. That was 133 days ago, and in the intervening over 6 months since, the S&P 500 has managed to stay above its 200-week average, and since 1950, signals a low is in place. Similarly, the S&P 500 has managed two consecutive positive quarterly gains and since 1950, that has never happened in a bear market. In fact, there are at least 6 signs (more than that) that Oct 12, 2022 was the low.
- Still, there is no consensus on Oct 12, 2022 representing the bear market low. In the traditional view, a bear market bottoms after the worst of a recession is underway. And in that cycle view, equities do not bottom until some sort of panic takes place:
– a bottom in earnings
– Fed intervenes or cuts rates
– policymakers panic
– public panics (VIX surge)
– stocks fall sufficiently (ala 2008 50% decline)
– or some variation of the above - We highlight in this report there are many bear markets since 1900 (over 20) and they fall roughly into 4 categories:
– business cycle bears (2018-19, 2015-16, 1956-57)
– idiosyncratic (2020, 1987, 1962)
– speculative bubbles (GFC, dot-com, Great Depression)
– inflation bear markets (1980-82, 1974-76, 1969-72) - We see this last category as best analog for 2022-2023. And the lesson from inflation bear markets is that markets trough when inflation peaks. And markets advance before the Fed relents.
- The case for the Fed to pause sooner than later is increasing. Foremost, inflation internals (our diffusion) show that 33% of the CPI basket is now in outright deflation and soon will be joined by housing and food, taking this to 81%. There is no precedent case where this high % of CPI is in deflation and we have high inflation. Moreover, the credit contraction from regional bank crisis is expanding and visibly leading to labor market softness. Soon, we will see tighter credit. Only if the Fed is backwards looking will this support “higher for longer.”
- Markets bottom before fundamentals 80% of the time (see below) and S&P 500 P/E (2024) is 15X ex-FAANG. This is hardly expensive. In fact, among the most expensive sectors are Defensives like Staples (19.6X), Utilities (17.5X) and Healthcare (16.7X). Cyclicals are the “cheapies” at the moment and on “trough” earnings as well.
- Bottoms tend to be V-shaped (60%) and symmetry to the decline. So rapid declines mean rapid recoveries and would be consistent with S&P 500 recovering to 4,750 by YE 2023. Moreover, in 1982, the post-inflation recovery was nearly vertical. After a 27-month bear market thru 1982, the S&P 500 recovered to an all-time high within 4 months. The key is a Fed relenting and that will only happen when inflation falls sufficiently to satisfy markets and the Fed.
- We see leadership into remainder of 2023 coming from FAANG (FNGS -0.09% )/Technology (QQQ -0.07% XLK -0.25% ), Industrials (XLI 0.11% ) and Energy (XLE 1.37% ).
– The rationale for FAANG/Tech is multiple including secular demand from labor shortage (offset wage), AI (obvious) and they are most correlated to easing financial conditions (89%).
– Industrials are most levered to a recovery in PMIs. This is already underway in global PMIs and we expect US PMIs to soon bottom.
– As for Energy, this remains one of our favorite groups (since 2021) and we see structural factors supporting margin expansion. A hostile administration is also supportive by limiting incremental capital.
BOTTOM LINE: When will investors be convinced the bottom is in?
This is a great question. Doomsaying and expecting further pain in the economy emanates from both the Fed and markets. Inflation is not something to underestimate. But as our work for the past year has shown, inflation is falling and we think by mid-year, we will see visible declines nearing pre-surge (2021). This is consistent with consumer surveys and also easing supply chains.
- May FOMC is a key date and we expect May CPI to be even more critical.
- so a lot of key drivers are in coming weeks
Pick your poison. We see new bull.
These are a summary of the 6 factors supporting Oct 12, 2022 as the low
Contrary to most beliefs, stocks bottom before fundamentals 80% of the time. This is true of PMIs, EPS and even sentiment. The only exception is CPI.
S&P 500 P/E (2024) is 15X ex-FAANG. This is hardly expensive. In fact, among the most expensive sectors are:
- Defensives like Staples (19.6X), Utilities (17.5X) and Healthcare (16.7X).
- Cyclicals are the “cheapies” at the moment and on “trough” earnings as well.
Take a look at 2022-2023 vs 1982. I would say this looks similar.
And when Volcker shifted the inflation war, the market went vertical.
We stick with Tech/FAANG, Industrials and Energy.
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34 Granny Shot Ideas: We performed our most recent rebalance on 4/26. The Granny Shots page will be updated shortly. See 4/26 report for more details.
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