‘Capitulation Events’ And ‘Nightmare Scenarios’
The rates-driven, valuation compression stage of the bear market may be mostly behind us assuming inflation moderates going forward, but "it could be a case of out of the frying pan, into the fire." That's according to BNP's Greg Boutle and Maxwell Grinacoff, who see "a capitulation event in equities next year," when the US is likely to fall into recession thanks in no small part to the lagged impact of the most aggressive Fed tightening campaign since Paul Volcker. Higher rates in 2022 led to
5 thoughts on “‘Capitulation Events’ And ‘Nightmare Scenarios’”
Good note, as always. Many thanks!
To your point, it’s a good bet there’s some risk in ’23. But I have a longer time horizon, so I’ve been buying in the downcycle and I’m all in to ride it out. The problem is I don’t have any idea what will actually befall my income, my health, my stocks, the market, etcetera. I believe my investments are well-placed and the market will do its daily dance, generally following the path described in your comments and those of Boutle and Grinacoff at BNP.
I imagine the year will play out in a way that’s similar to what Boutle and Grinacoff suppose. But what I imagine is a blind hope. I make a calculation and move forward. I’m no swami. And outcomes are never guaranteed.
If I remember correctly, 2000-2002 was painfully drawn-out. The Tech Bubble burst, but the real economy degraded slowly into a moedst recession, and it took a looong time for stocks to finally bottom out. I think that with the Fed turning the screws tighter into the slowdown, the 2022-2023 downturn should run its course more quickly. That may be as much hope as analysis.
So many of us “would like to” see a capitulation followed by the raising of the all clear flag as a signal to pile back into risk assets. Is it ever that easy?
Especially since it looks like investors are not overweight stocks anymore. Doesn’t it appear that upside FOMO has started to be the fear trade?
“Especially since it looks like investors are not overweight stocks anymore. Doesn’t it appear that upside FOMO has started to be the fear trade?”
I do spend a lot of time worrying about the “soft landing and up from here” scenario, now that “recession and new lows” is the consensus.
The “soft landing and up from here” scenario goes, I think, something like this:
1. In early 2023, the shelter component of CPI rapidly declines to zero-ish, goods CPI remains benign, and the remaining services components of CPI ease, thus total CPI eases to around the Fed’s target, on a monthly annualized basis anyway.
2. The Fed thus stops its tightening before significant further damage is done to the economy.
3. There is no recession, just a mid-cycle slowdown akin to 2015-16. 2023 becomes one of the yield curve’s false alarms (there have been some).
4. SP500 EPS for 2023 settles around $220-ish (i.e. flattish to 2022) and SP500 EPS for 2024 looks like $240-ish (i.e. 8-10% growth).
5. SP500 NTM P/E rises to 18X-ish (i.e. about where it got to in 2017, coming out of the 2015-16 slowdown.
6. SP500 price heads to 18X $240 = $4300-ish (i.e. about +9% upside from here).
This does not require EPS growth in 2023 or Fed to start loosening rates.
How plausible do we find this scenario?