The US stock and bond markets are finally starting to catch up with our views. We’ve always thought the last couple of years represented a fake bull market built on sand, not concrete.
And frankly, we also remain steadfast in the view that inflation fears will soon pass – the bull market is being extrapolated and highly irritated by economists, strategists, analysts, and media types who don’t seem to see beyond the tips of their noses. Late Effects of DXY Supercharged US Dollar Rate,
Significant in terms of impact on the cost of imported goods. Inventories have turned from deficient to excessive and will have to be corrected with price discounts.
The growth in the money supply has literally collapsed and there is no beat in the velocity of money. Fiscal policy shifted, within a year, from radical policy
An inducement of restraint would cause the remnants of the tea ceremony to blush. The cyclical side of the commodity bull market is in the rearview mirror. As Federal Reserve Chairman Jay Powell focuses short on “jobs,” a very weak data point, he missed the rise in layoffs and the downturn in the company’s hiring plans. Inflation will melt next year, and few (if any) are ready for it.
I feel like I’m reminiscing about the summer of 2008. The stock market is following the familiar pattern of a bust-and-bear market. The first stage is the multiple rate/earnings contraction caused by the Fed. Typically the first 20% drawdown is about how the liquidity drain is causing the price-to-earnings multiplier to shrink—usually by four percentage points in that first batch of a downturn bear market.
This time around, the pressure has been five multiple points since early 2022. How cool. Every recession in the economy necessarily implies a contraction in profits, which has not yet happened. Like I said, it was all about complications. So far, that is. A simple slump in GDP, however moderate or severe, sees corporate profits fall more than 20% from their peak.
This is the next shoe to drop. It also means that once analysts start to absorb reality and start cutting their numbers, investors who dip their toes into the market now because they think valuations have improved “enough will face their own reality, no – depending on where the consensus will be forced to proceed with the valuations.” EPS Futures – The stock market isn’t as “cheap” as it seems right now.
Nobody can ring a bell at the tops or bottoms. But there are well-established patterns at the basic lows. First, the stagnation view must become mainstream. Analysts have to exaggerate their downward earnings expectations. There is no low in the market until the Fed finishes tightening, and in a bear market for a recession as opposed to a liquidity-led slump (as in late 2018), it takes real policy easing to set market lows. This is a long time away.
Read: What to expect when you expect a Fed rate hike to hit housing, stocks and other ‘certain’ things
The US stock market also needs help from the Treasury market to support the “relative” valuation. In the past, the end of a bear market in stocks required an average decline of 135 basis points (1.35 percentage points) in the 10-year Treasury TMUBMUSD10Y,
fruit. Before anyone turns bullish in stocks, history shows that we need a big rally in bonds first. Note to asset mix difference: This means the tranche is back below 2%.
Also, keep in mind that the dividend yield on the S&P 500 SPX,
That’s a minuscule 1.5% – Bear markets usually don’t end until dividend yield converges with bond yield. Mathematically, this means that the S&P 500 is lower near 3300. 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 at Rosenberg Research.
more: This Wall Street legend has lived in every bear market since the 1950s. He says the next person might hit the S&P 500 with a 30% loss.
Plus: ‘The Fed always cheats’: This forecaster sees inflation peaking and US stocks in a bear market by summer