![]() Data from multiple states show a large gap between vaccinated and unvaccinated hospitalizations and deaths during the Omicron variant surge last winter 4. For anyone looking to add risk to portfolios this year, more bad news is now in the price for equities (the S&P selloff of 18% from its peak is ~70% of the average selloff during the prior 11 recessions), but still I think you can be patient.ĬOVID vaccines continue to yield massive public health benefits. Large declines in manufacturing and bloated inventory conditions usually result in large earnings declines. ![]() As shown in the last chart, rising inventory levels in the US have now converged with falling sales. Leading indicators point to a decline in manufacturing activity this fall (third chart), and the lean inventory positions of a year ago are gone. US equity markets are also not pricing in a recession yet: according to Goldman Sachs, S&P 500 pricing for cyclicals vs defensives implies an ISM reading of 49 and GDP growth of 0%-1%.Įconomic growth is likely to fall as central banks tighten. The barometers tell a similar story: the COVID stimulus boost to valuations has now been unwound, but for the most part, investors are still paying a large premium for companies with high expected earnings growth, at least relative to history. Before we get into that, see the second chart: while the premium investors pay for growth has come down a lot, it’s still high vs history. The market barometers on the following page show how valuations have declined. That’s why I am less focused on earnings right now this correction (so far) is all about overpriced multiples finally coming down. And the more positive real yields become, the more equity multiples are likely to fall. Now that real yields are moving into positive territory again, P/E multiples are declining. As shown in the next chart, when real Treasury yields went negative in 2020 (i.e., Treasury rates fell below inflation), that’s when P/E multiples shot up over 20x. Inflation, central banks and P/E multiples. Even if that happens now (which I doubt), the Fed has a ways to go before it can stop tightening. Bottom line: there’s a lot riding on when inflation peaks. On top of all that, rising food and energy prices are now feeding into airlines, restaurant and lodging prices 3. Inflation has already blown past the IMF forecast for Europe, and as shown below, there’s evidence of a wage-price spiral in the US in low wage industries 2 US labor markets are still at their tightest levels in the post-war era and supply chain pressures which spiked last year have yet to abate (some of which is due to the China lockdowns). As per the first chart, the IMF sees US inflation peaking around current levels. A lot of Wall Street research claims that inflation is peaking now, and a recent IMF report came to similar conclusions 1. Valuations have declined materially but the price paid for high earnings growth is still elevated.Ī bottom for equities is likely to coincide with a peak in inflation, since that will signify how much central banks have to tighten. Be patient when adding risk to portfolios. Summary: The slowdown induced by central bank tightening is just starting. Topics: Bear market barometers, a “Maltese Falcoin” crypto update and a COVID apology
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