Stocks Treading Water for a Good ReasonStocks cannot get out of neutral. If anything, they appear to be going into reverse. Makes sense... they ripped~ 30% higher in 9 short months. But the risks are increasing as prices rise. This post looks at "equity risk premium". In short, investors are not being adequately compensated for the risk being taken in stocks (at current valuations) against the risk free return from Treasuries.
Hints of Mid-2007It's been said that whilst history doesn't repeat - it often rhymes. For me, 2023 offers some parallels to 2007. To be clear, things are not exactly the same (they rarely are) - however I will demonstrate some similarities. What's more, I continue to remain long this market (with about 65% exposure). That said, if I'm correct (and I may not be) - it could raise a 'red flag' for 2024. Three things (1) fed monetary tightening takes between 12 and 24 months to make its full impact; (2) the economy also looked very strong into Q4 2007; and (3) sustained inverted yield curve cause recessions. In my view - the market is losing sight of the fact of how long the lag effect can be.
Bulls & Bears Can Make a Solid CaseIt's fair to say this is one of the more hated stock market rallies. Why? Rarely have I seen so many caught on the wrong side of the trade. Sentiment is overwhelmingly negative. And yet the S&P 500 is up ~20% from its October low. This missive outlines both the bull and bear case. Either side can make valid arguments. This is what makes things so interesting. In short, you must have exposure to this market. However, you should do so with your eyes wide open.
Powell’s PunchIn what was supposed to be a 'vanilla' testimony to Congress - Jay Powell turned this into a market moving event. Not pleased with how market participants interpreted his previous address - he set the record straight that rates will be higher for longer. His testimony left no room for ambiguity - it was full hawk. Markets quickly revised their forecasts for the peak Fed funds rate - with some now thinking 6.00%. What's more, the 2/10 yield curve is now negative 107 basis points. We have not seen that since 1981. Soft landing? Good luck.
Remain Wary of PermabearsJeremy Grantham is a well known permabear. This week - he called for a possible 50% correction. Sure... it's probable we see something in the realm of 20%... but 50%? I decided to look at Grantham's track record against the S&P 500 over 25 years. Guess what - he has woefully underperformed the market. Hardly surprising. Beware of doomsday 'crash callers' like Grantham... and he is not alone. They are dangerous.
Foolish Forecasts and Questions Worth Asking It's the last trading day for 2022 - which means it's time for some 'foolish forecasts'. The S&P 500 booked a 19.4% loss this year... its 4th worst since 1945. My foolish forecast is the lows are not yet in... however 2023 will represent opportunity.
The 40-Year Tectonic Shift2022 will be remembered as an important turning point. Not because the S&P 500 surrendered 15% to 20%... it will be remembered for the tectonic shift in monetary policy. For the first time in over a decade - interest rates are finally trading at closer to "normal levels". What's more, we are not going back to 0% to 2.0% rates for a long time. And that has many implications for how to choose to invest...
Watching the VIX for a Market ReversalWith the VIX approaching a level of 20 - the market feels overly complacent. The S&P 500 is now around 15% off its October low - resembling what we saw in June. My guess is should we see the VIX below 20 - expect the market to reverse shortly thereafter.
We’ve Seen This Script BeforeQ3 2022 big-tech earnings are behind us - with only one winner. Apple reported inline results with weak guidance - but enough to send the stock 7% higher. The rest however were slaughtered on weak earnings and forward guidance. But it was the Facebook's "metacurse" which sent the stock reeling almost 30%... Amazon was also crushed on a poor Q4 outlook.
Druckenmiller Warns of 2023 ‘Hard Landing’There are few smarter in the investing world than Stan Druckenmiller. For 30 straight years he averaged a 30% CARG whilst not having a single losing year. It's unparalleled. He is warning that stocks are still over-valued (despite a 24% correction) and a hard-landing is likely by the end of 2023
