‘Hope’ Floats, But What About ‘Growth’?
Markets are currently transitioning from "hope" to "growth," Goldman's Peter Oppenheimer said, in a new note that echoed many of the themes regular readers likely know by heart.
Equities pull forward future outcomes or, more precisely, expected future outcomes. They (stocks) don't know what the future holds any better than the people and machines trading them do. After all, prices reflect nothing more than an agreement between a buyer and a seller, neither of whom are fortune tellers.
With tha
Good post!
Thinking generically about the characteristics to select for in these successive phases.
Imagine if you only knew 4 things about stocks, and it was all historical (no forecasting): 1) price, 2) balance sheet, 3) return on [equity, assets, invested capital], 4) growth.
I posit that in the earliest phase of a recovery (aka early cycle, aka “Hope”) you want to select for 1) [large price decline] and 2) balance sheet [debt as % of enterprise value much greater than pre-crisis]. As the recovery progresses to the next phases you want to shift selection to include 3) [higher returns] and 4) [higher growth]. In the later stages of the cycle you want to emphasize 4). Finally, as the latest state of the cycle (say, when yield curve inverts) appears you want to revert to 2) [now looking for debt % low] and 3) [high returns].
More about this later . . . gotta hop
The above is a framework I’ve used through the last couple of economic cycles. As suggested by the chart in H’s post, this cycle bears some similarities to the GFC cycle. We are sort of in early 2010. Cycles differ, of course. I don’t recall any analogue in the GFC to the “pandemic winners” and “vaccine” stocks of 2020, and the scale of monetary and fiscal action now has little parallel in 2009. Nevertheless, I think the broad framework holds.
We are now, I think, nearing the end of the first, “Hope” stage. So selection criteria should be shifting to include 3) and 4).
Finally, look at the SP500 charts from 2009 on. The market rally did not end in early 2010, though it was interrupted around April/May. We could have such a slump this year, and if so it won’t mean this market rally has ended.
I would be thrilled with 7% the next 12 months.