‘What If The Future Isn’t So Tidy?’ McElligott Asks
Reduced to the basics, market participants harbor a somewhat binary outlook on inflation and monetary policy in the US.
Notwithstanding Jerome Powell's steadfast contention that he's not trying to "induce" a recession, policymakers are operating on what amounts to a single mandate, where the inflation fight takes precedence over growth. Higher unemployment isn't just "acceptable collateral damage," it's a wholly necessary and desirable outcome -- at least up to, say, 4.5%.
At the same time, he
I don’t know if inflation is going to break very soon but it looks like it will be reigned in at some point in the near future. The demographics for most developed nations are pretty depressing for growth. It will take time for all the shocks to wear off and for us to see a clear path in the future. In the meantime, we are in a regime that suggests subpar market returns. Analysts that suggest the Fed may delay lowering rates could well be correct. If the consensus of 2 x 75 for the next two meetings is correct, we could see the economy markedly slow by the end of this year.
Thinking beyond the next earnings season or two, “a grueling sideways ‘chop’ with persistently tighter financial conditions” wouldn’t necessarily be a bad thing: a lot of capital has been misallocated to non- or not-terribly productive uses over the last decade and it seems like a good time — healthy labor market, decent growth, asset prices up smartly — to get rid of some of the dead wood.
Why should a sideways chop be one’s base case scenario, instead of another -15% drop in SP500?
Not being rhetorical; a serious question.
SP500 EBIT margin is still the highest ever, EPS growth has only just started to roll over, NTM PE is still almost 3 multiple points above where it bottomed in 2019-2016-2014, Fed funds have another 150 bp -ish to rise, infl
The hope that inflation (in the US) will cool quickly seems like wishful thinking. It seems unlikely that Putin will “play nice” with Europe; the first cargo ship that hits a mine and sinks will represent the end of the Ukrainian grain trade through the Black Sea. If and when Xi quits trying to achieve “zero covid” and fully reopens the economy, the demand for (and price of) commodities may increase. When the Texas energy grid crashes (from overuse, lack of maintenance, hurricane, etc) or another Texas cold front in February cause a huge spike in natural gas prices, energy prices will increase. The drought in California (D3-D4) will continue to affect fruit, nut and vegetable production. Western Kansas and southwestern Nebraska are in drought (D2-D4); the “wheat state” will produce less wheat, corn, etc. The idea that the Fed will reduce rates before the market capitulates seems like a pipe dream. The BA.5 and BA2.75 covid variants may cause more supply chain difficulties.
H-Man, not in the tweener camp. Today Force Majeure announced by Gazprom. Option 2 seems to more in the cards.