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Prone to panic in 2022, the market now is convinced that the Fed “gonna break” the market

If someone asked us to explain the primary difference in our relatively more sanguine view of the world versus consensus, it is really the difference between “fighting the Fed” and “counter-trading the panic.” In many recent reports, we highlight (and continue to do so) how the bond market is doing a lot of the work for the Fed:

Airplane Panic GIFs | Tenor
Source: Airplane the movie

…we are less panicked because Bond market doing work for Fed

An example of how markets panic sooner than previously, take a look at the yield on the 10-year and compare it to Fed Funds rate. This is since 2005, or the last 3 cycles:

  • in 2004-2006, Fed raised FF from 1.0% to 5.25%
  • 10-year initially fell 80bp from 4.9% and only rose 30bp to 5.2%
  • Fed raised FF +4.25%, but bond market only +0.3%. Hardly reacted

  • in 2016-2018, Fed funds rose +1.75% from 25bp to 2.25%
  • 10-yr initially fell 90bp to 1.4% and then rose to 3.2%, +0.90bp
  • FF +2.25% but yields only +0.9%, hardly reacted

  • in 2022, Fed funds raised +25bp from 0.25% to 0.50%
  • 10-yr surges from 1.7% to 3.0%, +1.30%
  • FF +25bp and yields surge 130bp.

See the difference? The bond market is tightening financial conditions dramatically. This is doing the work of the Fed.

  • we think this means the hawkish pivot by Fed will show up in financial conditions, therefore economy, far sooner.
  • hence, since the bond market has panicked, the Fed has less work to do.
When pundits panic, investors should counter-trade. 5 of last 6 FOMC, stocks rallied

Today is FOMC day, +50bp and 4 hikes of 50bp priced in…

Today (5/4) is FOMC decision day and the Street is looking for a 50bp hike. And while many commentators say QT (balance sheet run-off) is key, Fed fund futures say that 50bp hikes are priced into each of the next 4 meetings. So hawkish expectations are largely in the market.

For those who have become macro bears, one of the central views is that:

  • Fed will tighten until either the economy or markets break

That is, the market view at the moment is only a “shock” will fix inflation problems, and this shock needs to be delivered to financial markets. So in the meantime, stocks are “walking dead” because the Fed plans to kill the stock market.

When pundits panic, investors should counter-trade. 5 of last 6 FOMC, stocks rallied
Source: https://www.barrons.com/articles/stock-market-drop-fed-51650665694

Investors today are taking it as canon that the Fed will take down equities. And technicals are also awful, so there is double-conviction on this view.

  • But to me, these are just signs that pundits are in panic-mode again
  • and generally, one needs to counter-trade panic

For whatever reason, markets seem far more prone to panic today (last 5 years) compared to the 30 years I have been following markets (yup, 30 years peeps). Is this because of:

  • social media?
  • alternative data/machine learning?
  • algos?
  • reddit/Wall Street bets?

Not clear.

IT’S ABOUT THE PANIC:in March 2020, market panicked as pundits CONVINCED Fed could not save the market

Recently, many clients have noted that Fed is the only thing that matters. So, in 2022, there is a “panic” about Fed killing the tape.

  • many of these very same folks said the Fed is the only reasons stocks are up since 2020

There is a lot of “false memory” at work. Here is the problem with this logic:

  • In early 2020, as stocks tumbled due to massive hysteria around COVID-19
  • many pundits said “nothing can save markets” and many expected 80%-90% decline in stocks
  • many pundits said Fed could not “save the market”

Why does this matter?

  • If pundits believed Fed could “save” markets, many would have been buying equities down 37%
  • instead these pundits were “shorting stocks,” expecting a massive decline

Curiously, there is a lot of revisionist history out there. But take a look at the headlines below. This is mainstream media, citing well known strategists and pundits.

  • it is evident that in the midst of a massive equity decline
  • pundits/investors said Fed could not save financial markets
  • many doubted anything could fix the markets

In retrospect, those views were dead wrong.

When pundits panic, investors should counter-trade. 5 of last 6 FOMC, stocks rallied
Source: https://www.ft.com/content/d4e29856-5987-11ea-a528-dd0f971febbc
When pundits panic, investors should counter-trade. 5 of last 6 FOMC, stocks rallied
Source: https://www.nytimes.com/2020/03/27/business/fed-stock-market-coronavirus.html

How do we apply this to 2022? Please counter-trade consensus panic — whatever the panic is

Before telling us that this means the Fed is the only thing that matters, that is not how I see it. The takeaway is:

  • consensus panics about something
  • says there is no way out
  • except for markets to crash
  • counter-trade this

The future is uncertain, so take this as simply another perspective

Equities have rallied post-FOMC 5 of the last 6 meetings

Stocks are sort of in limbo into Fed day (5/4 press conference). Below, we have highlighted equity performance post-FOMC in the last 6 meetings:

  • 5 of last 6 meetings, equities have staged rallies of 3% to 9%
  • Sept 2021 was the exception and stocks fell.

Given the huge decline in stocks into this May FOMC, we think odds favor an outcome similar to the 5 rallies = stocks could bounce in May. We have a lot of egg on our face, so we say this, knowing markets have been marching to a new tune.

When pundits panic, investors should counter-trade. 5 of last 6 FOMC, stocks rallied

STRATEGY: From 1990 to 2008, 10-year yield averaged 5.3% and S&P 500 P/E 18X vs 18X today

We think stocks remain the best risk/reward for the next 5 years (Bitcoin as well). And this is especially true if interest rates drift higher — bonds will lose money. This idea of TINA remains important as one thinks of asset allocation.

Now we realize many clients say the S&P 500 P/E needs to de-rate, or fall, if 10-year risk-free rate rises.

  • S&P 500 P/E is 18X
  • 10-year is 2.9%
  • Many investors believe if 10-year rises further, P/E needs to fall

This, however, is not really supported by market history. Take a look below:

  • from 1990 to 2010, or 20-years, the 20-year averaged 5.3%
  • S&P 500 P/E averaged 17.7X
  • 10-year is 2.9% today vs 5.3% (from 1990 to 2010)
  • S&P 500 P/E is 18X vs 17.7X (from 1990 to 2010)

So, there is a whole lot of room for yields to rise. But arguably:

  • the S&P 500 P/E is already at levels associated with a 5.3% 10-year
  • in other words, a lot of bad news is priced in
When pundits panic, investors should counter-trade. 5 of last 6 FOMC, stocks rallied

…If FAANG stabilizes, market overall has footing

We realize technicals have been terrible. And many are also negative because FAANG has been falling since November 2021, meaning FAANG has been leading the market lower. We think FAANG might have finally fallen enough to become attractive risk/reward:

So, valuations are close to “value” and these companies can generate top-line growth above that of GDP and with superior ROIC and ROE. In fact, these are cash-rich companies.

When pundits panic, investors should counter-trade. 5 of last 6 FOMC, stocks rallied

…6 of 7 big FAANG stocks have outperformed last 5 days

Another encouraging sign is that 6 of the 7 major FAANG stocks have outperformed last 5 days:

  • only laggard is  AMZN 0.19%
  • best is  FB, outperforming by ~2,000bp past 5 days
  • If FAANG has found its footing, we think stocks overall can bottom ahead of technicals
When pundits panic, investors should counter-trade. 5 of last 6 FOMC, stocks rallied

Recall, Market has flipped and now faster growing companies trade at a discount to slow growers… Growth is now Value?

I want to highlight this again. Look at how growth rates and valuation have completely inverted:

  • Faster revs growth = lower valuations vs slow growers
  • Faster revs growth = higher FCF yields vs slow growers
  • the coefficients have completely flipped, as shown below
  • Why would the market price faster top-line at a lower valuation?

This is sort of the opposite of common sense. Companies with faster growth (Growth stocks) are trading at a discount to slower growers. This is true for either P/E or free cash flow. I am not sure this makes a lot of sense.

When pundits panic, investors should counter-trade. 5 of last 6 FOMC, stocks rallied
When pundits panic, investors should counter-trade. 5 of last 6 FOMC, stocks rallied


STRATEGY: We lean relatively “bullish” into 2H2022 (but also 2Q22), but warn of jagged next few months… Stick with BEEF
To recap on equity strategy, we are leaning bullish into 2Q2022.

Stocks have continued to be treacherous in 2022. Investors are on a hair trigger.

– this is in context to a challenging 1H2022
– so jagged next 3 months

Broadly, our existing sector strategy of BEEF remains valid. Even in war. Even with inflation. In fact, the last few weeks are strengthening the case for our “BEEF” strategy. That is, BEEF is

– Bitcoin + Bitcoin Equities  BITO 3.26%   GBTC 3.22%   BITW -2.74%
– Energy
– FAANG  FNGS -0.16%   QQQ -0.21%

Combined, it can be shortened to BEEF.

Why is this making stronger BEEF?

– Energy supply is now a sovereign priority
– this helps Energy stocks

– Ukraine and Russia both want access to alternative currencies
– this strengthens case for Bitcoin and bitcoin equities

– if Global economy slows, growth stocks lead
– hence, FANG starts to lead  FB  AAPL -1.12%   AMZN 0.19%   NFLX -1.10%   GOOG 0.21%

All in all, one wants to be Overweight BEEF

When pundits panic, investors should counter-trade. 5 of last 6 FOMC, stocks rallied

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31 Granny Shot Ideas: We performed our quarterly rebalance on 4/5. Full stock list here –> Click here

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POINT 1: Daily COVID-19 cases
This data will be updated every Friday.

POINT 2: Vaccination Progress
This data will be updated every Friday.

POINT 3: Tracking the seasonality of COVID-19

This data will be updated every Friday.

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