‘The Thrill Is Gone’ For Equities. And Your QT Questions Answered

For the better part of a dozen years, stocks were beyond reproach. Thanks to subdued inflation across the developed world, the Fed had more than enough plausible deniability to persist in a growth-conscious policy bent, which meant, among other things, everywhere and always citing the threat of disinflation as an excuse to lean incrementally dovish at the first sign of trouble. Decelerating economic momentum was an excuse. Below-target inflation was an excuse. And, crucially, falling stocks we

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5 thoughts on “‘The Thrill Is Gone’ For Equities. And Your QT Questions Answered”

Thanks for the two explanatory quotes at the end of the note. Very helpful.

WMD

September 3, 2022 at 4:23 pms Reply

Seconded. I was actually really curious about this

At some point in the fed’s MBS runoff schedule there will be a good entry point to get on Harley Bassman’s long MBS, long mREIT trade. Any thoughts on when? Or maybe I should just embrace the “Sizing is more important than entry-level” advice…

Having been bearish for so long (over a year), I decided to focus on the bull case. Mine looks something like:

Inflation (in the US; unless noted this is a US-centric stream of consciousness) trends lower over the coming year. CPI inflation is roughly equal parts commodities, supply chain, shelter+services. Commodities have rolled over (oil, ag, metals). Supply chain is detangling (freight rates, containers, inventories). That’s about 2/3 of inflation that can decline/reverse, while the other 1/3 will take longer to ease (rent, OER, wage).
Fed hikes to 400 bp by year-end then, mindful of lagged effects and seeing monthly inflation easing, holds.
QT drives MBS/mortgage rates higher but forces on long Treasury rates are mixed, with growing recession, easing inflation, foreign investment flows (would you rather be in UST or UK/European govts ahead of winter?) pushing rates down while Fed hikes/QT pushes up. 10 year yield doesn’t rise a “lot” more.
Recession gets real. Housing prices decline (not 2008-type default-fire sale, but a price discovery process), labor unemployment rises, wage growth slows, consumer spending slows, corporate margins and profits regress. Not a “technical” recession any more. But not a severe recession – more mild – because we’re starting from extremely low UE, very high margins, significantly undersupplied housing (single-family), well capitalized banks and consumers (not the lowest income). Think 2001 not 2008.
S&P 500 earnings optimism-denial finally cracks. 2023 estimates go down enough to finally be realistic.
S&P 500 multiple declines. Unevenly – some sectors are already where they need to be, others (tech) are still too high. Overall decline doesn’t need to be huge. I don’t think S&P 500 should trade at extreme PE lows given inflation declining, Fed holding, 10 year with 3-handle, energy hampering foreign competitors, US’ mild recession making it “best house in global neighborhood”.
S&P 500 price takes the third and last drawdown of what will have been a year-long bear market. Not that a year is a long time, but everything seems to happen faster now.

Hmm, that doesn’t sound awesomely bullish, but it is the best I can do. It suggests, to me, that in the bull scenario we have another leg down and then, look for the inflection.

Pollyanna?