Why The S&P May Have A Date With 4,000
One constant in an ever-changing market narrative is the notion that equities are one of, if not the, best inflation hedge.
Stocks, the story goes, are a claim on nominal growth. Sure, you could buy some land or invest in commodities, but most everyday people aren't in the market for a "portfolio" of land, and neither are the majority of investors well positioned to speculate in raw materials via futures. So, "dumb" equities it is.
But there's a problem. Stock prices ultimately follow corporat
For me, the difficulty lies in trying to estimate to what extent the market has already discounted this negative impact and is looking forward to say 2023 onwards. Spy fell approximately 15% peak to trough already which, while not equal to the nice round 20% typically accompanying such conditions (perhaps due to the stubbornness of aapl and to a lesser extent msft stocks), is still meaningful.
Further, I believe two of the previous four mentioned dates saw meaningfully positive 12 month forward returns (98 and 2020).
With the index having returned to around -7% from ath and sentiment (at least as measured by cnn’s fear and greed index) having normalized, risks are slightly to the downside imo. AAII sentiment is extremely bearish, yet actual positioning in terms of breadth and equity allocations doesn’t seem nearly as bearish. My best guess is this is due to investors’ simplistic view that inflation is positive for equities.
I have been impressed at how well corporate credit spreads have been holding up thus far (…notwithstanding the pop after the Invasion, roughly half of which has been retraced).
H-Man, not being one to dumb it down but how does raging inflation, rising interest rates, and current Ukrainian conflict provide any support for equities? I guess that is why God invented rose colored glasses.
The reason high yield spreads have held up is due to the fact that the energy weight in the index is approximately 25% and their are probably other commodity related companies in it as well. One thought on Wilson’s take, which I am sympathetic to is that if equities do have a date with 4000 it will have to occur at a time when sentiment on the economy as shown above is pretty dire and sentiment in the equity market is also dire as shown by BAML Bull / Bear or AAII bulls. Also, it can be shown that typically margins do not compress (in aggregate) until right before recesson. This idea that higher costs at some point do not get passed on to the consumer which thereby compresses margins is an idea which does not stand up well to scrutiny. Sure, if recession is about to happen, you see it, but unless that is dead certain, I would not expect it.