S&P Bear Market: What If Jeremy Grantham Was Right?
I've talked quite a bit about valuations lately. Specifically: How far and how fast they've come in.
2022's stock selloff is a multiple compression story. So far. This week suggested it might soon become an earnings recession story, though. Abysmal reports from a who's who of retailers augured poorly for the US consumer.
As JonesTrading’s Mike O’Rourke put it, "companies that were once thought infallible are stumbling daily." That, he warned, means "investors can't have faith in current 20
Market decline: feature, not bug . . .
“There has been a lot of repricing in markets,” Bullard said. “Part of that is due to the Fed, but part of it might also be what were the prices before the downturn occurred. You would expect with the Fed raising rates that all these assets, trillions of dollars worldwide, would have to be repriced.”
https://www.bloomberg.com/news/articles/2022-05-20/fed-s-bullard-says-front-loading-could-lead-to-rate-cuts-by-2023
Whatever the bottom is, my guess is we’ll get there faster than prior cycles might suggest. This is the first tightening cycle I have personally experienced in which, one might suspect, asset repricing is not only not a concern to the Fed, but one of the Fed’s desired outcomes.
“Don’t fight the Fed” again, but in reverse this time.
Nice summary.
And hats off to H for telegraphing- I read his lines and also in between his lines, but I did not like what he was saying.
I missed selling close to the top- but I will definitely (still) be in at the bottom.
In my psyche, I have always had a harder time selling/letting go. “Getting in” is so much easier (for me). As in life, will work on shifting gears. GLTA.
In the Graham and Dodd security analysis text I taught from in the 70s, the average P/E was reckoned about 13-15x and the authors were beginning to recognize that growth stocks might need higher multiples. They related these multiples to AAA bond rates and growth. The BofA chart shows the 20th century ave at about 14x, right in G&D’s range. That 3200 figure somehow feels right. Hang on. At that level a lot of folks wanting to retire early will hit a big speed bump if any of this is right.
“Since 1948, the median peak-to-trough drop for S&P earnings around recessions is 13%”. It appears this 13% drop is being applied to an S&P 500 earnings number of $209 to get to a recession scenario trough of ~$182. Note that this recession scenario trough level is ~16% HIGHER than the annual 2019/pre-pandemic RECORD earnings of ~$157. I’d suggest higher inflation/costs, higher interest rates AND a recession would take S&P 500 earnings much lower than ~$182 (and likely lower than the pre-pandemic record earnings of ~$157).