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Stocks: Don’t Believe Everything You Read
Nearly three months into 2022, US equities are largely indecipherable.
There's nothing unusual about market participants and journalists retrofitting a narrative to the price action or resorting to humorously belabored attempts to explain stocks' behavior by reference to a set of incompatible headlines. What is somewhat unusual, though, is the extent to which media outlets themselves are now skeptical of such efforts.
"Remember when equities were infinite-maturity assets with elevated valuatio
My risk model has been saying lately historical volatility is up- which is what your article also suggests. As a manager of other people’s money this would suggest a contrarian should buy, since volatility is often mean reverting. I am sitting it out, but I am not selling. The market in the short and intemediate term is a beauty contest and is largely driven by sentiment. Over the longer term (say 5+ years) markets are weighing machines and are more earnings and results driven (paraphrase Buffet/Munger). As the article suggests if shorter term volatility levels out – there is ample incentive for trend followers and everyone else to buy. The most solid thing for the market in my view is to have a flattish year to take some of the froth out, without upsetting the apple cart. As the rolling stones said once, you can’t always get what you want, but if you try so hard, you can get what you need… (or something like that).
Great summary of systematic exposure adjustments we have seen, really appreciate you distilling it for relative laymen..
But I see nothing incredulous in the TINA argument.. we are seeing a second cost-push bout of inflation with the commodities disruption due to russian aggresion in ukraine after the lockdown induced bout of the last two years.. I have absolutely no desire to hold cash, even if productivity growth stagnates, and we move the same number of “things” the price of those things will go up, and therefore so will earnings, in dollar terms… in an inflationary environment (ie always) cash is not a store of value, it is only a facilitator of transactions… you have to own “real” assets, and apart from real estate and infrastructure, stocks are about the best approximation of a real asset we can all access.. (accepting they are actually a figment of our collective imaginations..)
As far as multiples go.. the SPY is pricing about 17.5x next years projected earnings.. not horribly expensive if terminal rates are in the mid-high 2’s
Prices dont go down because the news is bad, they go down because people sell things.. as a fundamental investor (rather than a manager of greeks or systematic trading programmes) you would only sell stocks because a. There is a better investment opportunity b. You need the cash or c. You are confident that you will be able to re buy your portfolio at a lower price..
it is not obvious to me that if I sold my stocks I will execute the buying back cheaper, as you discussed in an excellent piece a week or so ago, despite the fact that I may very well have the opportunity to…. So you sit it out… I dont know anyone that has sold any stocks, so why should the market not rebound, once the machines have done there work ?
Once again, we are “looking through..” ?
I’ve happily sold a lot this week after sifting through the smoldering ashes earlier this month. Always happy to have a fair amount of cash to deploy when the opportunity arises. I see no reason to be a hero here. Will I miss out on a SPY move to $480? Maybe. But the odds of SPY $420 are greater than SPY $480 at this point, IMHO.
I also think that given previously frothy tech stocks (im talking pypl or sq not googl or msft) seem to have held their lows and bounced, we are weeks away from a call for a rotation back into growth vs value..
Possibly I am too cynical, but the portfolio churn of calling for a regular rotation is part of the IBs business plan and an important revenue stream..
I’m starting to wonder if the next few months could turn out fairly positive for equities. We’re past lift-off. If the strats are back, that’s unabashedly good. If we’re pricing in a 50pt move at the next one or two meetings plus announcing a balance sheet reduction plan, then the Fed may, for once, seem to be back in front of the problem (evidenced by H’s “Fed may only deliver half…” article — we’re finally having to worry that the Fed might actually overdo it). Lastly, if we get any data that hints at inflation topping out, or some credible hint of resolution in Ukraine, then a glass half-full interpretation could emerge with the Fed narrative shifting from “the Fed won’t be able to …” to “the Fed may not need to …”, resulting in fewer hikes without the messy meltdown. After all, in the interest of sorely-needed stability in these times, the Fed could opt to trade fewer hikes for more time so long as inflation is at least drifting back down.
And worrying about a possible recession a year or more from now? Fine, it’s on the table. It’s not like that particular risk has ever really been off the table throughout our entire adult lives.
I agree uptownguy.. the market loathes uncertainty, and it feels to me that the market is viewing the current dot-plot as credible and reasonable, which has bolstered confidence..
Re: balance sheet reduction.. i haven’t seen the numbers recently, but are reverse repos still north of a trillion dollars ? or did the vol blow out suck that away.. if it is, the financial economy doesn’t really need the feds cash.. they are blowing and sucking at the same time..
Red.. you maybe correct that 420 is more likely than 480 in the short term.. and 420 might trade… id give it 30 pct probability..
Dont know about you, but id give myself about 5-10 pct probability of buying it the day it trades.. and id give 70-80 pct probability to it trading 480 in the next 24 months..
I am shorting my ability to buy when people (including me and possibly you) are fearful