Great post. I’ve been thinking through a lot of this and it was extremely helpful to see that you actually did a lot of then analysis for me, appreciate it. In as far as tracking down the typically drop in earnings during recessions and inflationary recessions, etc.
I’m putting together a post right now to think through the possibility of a market bottom — spoiler, I don’t think we are there yet. However, part of the piece is to consider that a recession and “another leg down” now seems to be consensus — and obviously when something is consensus it becomes a much less desirable framework for determining future outcomes. If everyone thinks we are in or near a recession, maybe the market can price in the recession before it even begin — instead of a 6-9 month lead the market shifts to a 9-18 month lead.
Thanks for reaching out, Brant. I look forward to reading it!
While I’ve been sitting squarely in the recession camp, there is a distinct possibility the Fed is able to achieve its ‘soft landing’. As Kolanovic put it yesterday night, “a mild recession is already priced in, peak Fed pricing is behind us”. I’ll add the main body of the article on my Twitter account (@GoingJGalt), for reference. If I recall correctly, it’s a similar view to what Kevin Muir expressed in a recent podcast with SpotGamma.
Under such a scenario, I believe the market could consolidate in price with a soft bullish tilt over some time, as the Fed softens its stance with decreasing inflation and EPS find their trough in the coming 6-12 months. Then we move on.
I agree, the soft landing scenario is a definitely possibility. The stock market has definitely priced in a mild recession, forward P/Es have moved into undervalued territory, and some other indicators such as consumer sentiment have priced in PMIs in the 30s. So definitely markets have moved fast to forecast significant weakness. I “debate” a good bit of this in my most recent post:
I think the most difficult thing for the Fed to navigate for a soft landing is the stickiness of inflation. Also, they seem to be using lagging CPI and the unemployment rate data as a way to gauge and justify policy — I think maybe because these items are politically visible. My view is the concentration on these lagging variables leads to an over tightening of financial conditions and by the time the CPI breaks and unemployment rises significantly it will be too late to reverse course fast enough to stop a hard landing. The longer oil and gas prices remain stubbornly high I think the greater the risk this scenario plays out.
Great post. I’ve been thinking through a lot of this and it was extremely helpful to see that you actually did a lot of then analysis for me, appreciate it. In as far as tracking down the typically drop in earnings during recessions and inflationary recessions, etc.
I’m putting together a post right now to think through the possibility of a market bottom — spoiler, I don’t think we are there yet. However, part of the piece is to consider that a recession and “another leg down” now seems to be consensus — and obviously when something is consensus it becomes a much less desirable framework for determining future outcomes. If everyone thinks we are in or near a recession, maybe the market can price in the recession before it even begin — instead of a 6-9 month lead the market shifts to a 9-18 month lead.
Who knows?
Anyway — great piece. Thanks for posting!
Thanks for reaching out, Brant. I look forward to reading it!
While I’ve been sitting squarely in the recession camp, there is a distinct possibility the Fed is able to achieve its ‘soft landing’. As Kolanovic put it yesterday night, “a mild recession is already priced in, peak Fed pricing is behind us”. I’ll add the main body of the article on my Twitter account (@GoingJGalt), for reference. If I recall correctly, it’s a similar view to what Kevin Muir expressed in a recent podcast with SpotGamma.
Under such a scenario, I believe the market could consolidate in price with a soft bullish tilt over some time, as the Fed softens its stance with decreasing inflation and EPS find their trough in the coming 6-12 months. Then we move on.
I agree, the soft landing scenario is a definitely possibility. The stock market has definitely priced in a mild recession, forward P/Es have moved into undervalued territory, and some other indicators such as consumer sentiment have priced in PMIs in the 30s. So definitely markets have moved fast to forecast significant weakness. I “debate” a good bit of this in my most recent post:
https://capitalnotes.substack.com/p/bottom-or-bear-rally
I think the most difficult thing for the Fed to navigate for a soft landing is the stickiness of inflation. Also, they seem to be using lagging CPI and the unemployment rate data as a way to gauge and justify policy — I think maybe because these items are politically visible. My view is the concentration on these lagging variables leads to an over tightening of financial conditions and by the time the CPI breaks and unemployment rises significantly it will be too late to reverse course fast enough to stop a hard landing. The longer oil and gas prices remain stubbornly high I think the greater the risk this scenario plays out.
Of course this is all just my opinion.
Again, great post and keep up the fantastic work!