Why hasn't capitulation occurred yet?
Forgive me for this noob question but I'm a bit confused that despite a plethora of indicators pointing to a massive market correction (inverted yield curve, PE and Q ratios are still 60-70% above their arithmetic means, etc), the market is still somewhat optimistic, with the SP500 on the uptick today. I know that the more dovish tone of the recent fed meeting and the prospect of rates being raised 25% instead of 75% has many investors convinced we'll have a soft landing, but for inflation to be reigned in, there most likely needs to be a rise in unemployment (and a subsequent recession), which has not happened yet. Do people really think things will be different now compared to past market cycles?
We have the benefit of hindsight of knowing that several months of denial happened before the stock market nosedived in 2008, but do people actually believe a soft landing is in the cards right now? Big tech stocks are outcompeting the traditional safety sectors like consumer staples right now. I'm confused about what the market is thinking right now.
Sometimes market go up and sometime market go down
"Bull or bear, that's the question"
I'm going to get this as a tattoo
My read: the Market can sometimes get overly locked in on what is a good trade for the next few days and weeks.
Powell changed his tune bigly in this past presser. He talked like a man who wants to say "see, I wasn't dead wrong about the inflation being transitory!". That signals pretty hard a dovish pivot. Which, with tons of liquidity still out there - means - risk on! (Even if it's just a short term trade)
Trying to time the market for a short term trade seems like the opposite of what Buffett would want.... isn't that just playing Russian Roulette?
Not everyone follows buffet’s style
Different investors have different time horizons. Buffets is “forever” if possible. Other players are high frequency, or intra-day, or on few day timescales. Not everyone is looking to buy and hold. Success on the other timescales is very possible for the most skilled players.
The market has been in a spiral since January 2022 with inflation ripping through the US Economy. This coupled with a War in Europe, Chinese Lockdowns and an Ultra-hawkish FED, doesn't bode well for equity prices in the short-run. Every economist from LA to New York had Recessions as their base-case for more than a year. Fast forward to 2023, Inflation is plummeting, the FED is slowing rate hikes & took a dovish pivot. Furthermore, economic data is coming back softer and softer. As time goes on, it looks like the "big and bad recession" the market has been pricing in for more than a year, isn't certain anymore, in fact, it's getting less and less likely.
On top of all that, in the 2H of 2022, you had every analyst on Wall Street saying "The S&P 500 is going to fall 20% in Q1 2023 due to poor earnings." Turns out earnings aren't that bad, however, they're not good.
If the next CPI report beats estimates again, It's difficult for me to see this 'risk-on' trend stopping.
This is why I love the market. When everybody is on one-side of the boat, the market will certainly do the complete opposite.
Let's see how it plays out.
I understand that view but I feel like believing this time will be somehow different from the history norm is just sophistry - what goes up must come down and the largest bull market in history, fueled by a year of QE, is no exception. It makes little sense why the job market is still strong even after multiple aggressive 75 bps hikes - perhaps more aggressive action is needed for inflation to come down for good.
There were a couple of false starts before the shit really hit the fan in 2008, for instance.
There's a saying that markets usually bottom before earnings, think this might be what we're seeing right now. Earnings weren't atrocious, but they might have one or two more weak quarters ahead. We still have a job market that is strong because most of the jobs that we need are blue collar jobs in services and manufacturing. All these tech layoffs and big corporates that are cutting barely make a dent into the labor market as a whole.
Biggest think to think about, in my opinion, would be the rollover/trickle down affect on the consumer from these layoff happening to high earners. We're also seeing a slowdown in enterprise spend so that might be the first domino.
Unemployment trails recessions, it's a lagging indicator. No one lays people off in anticipation of revenue going off a cliff, they do it as a response to it.
Question: How is COVID in any way related to 2008? It's two completely different crises with vastly different causes and effects. Conflating them will produce erroneous conclusions.
earnings are pretty bad. Amazon just turned into a $1T non-profit. Apple had -6% growth in revenue, the worst in decade. Google has been missing on earnings the whole year. Meta just reported -50%+ on earnings YoY.
I think it's just people view this stuff as past events now and expect the future to be better cause you can't go much worst than current situation.
Like I said, they're not good.
When you have 6 mos. of pundits saying earnings are going to reflect a recessionary environment, the market tends to price it in. Therefore, if earnings aren't grotesquely bad, but not bad as the market expected, the market will rally. This is what we're seeing.
Yep.
I think the consensus case is/was a recession in 2023 sometime, and that is priced in.
The risk/reward is skewed towards betting that the economy is not as bad as first thought and sets the stage for a low-base 2023H1 into a 2024 recovery.
The worst case is the market moves down on worst-than-expected economic indicators, which moves the indices back into early 2023, and late 2022. There needs to be a very large macro event to act as a contagion and further push US/global markets downwards. After 2022, not sure what else there is. Maybe China invades Taiwan or North Korea drops a nuke for realz. Both unlikely to happen in my opinion. US-China diplomats get in a fist fight on stage. Who knows?! It's wild out there.
Fingers on the trigger waiting for that CPI readout.
Current setup is good for a recovery given how much recession was anticipated back in 2022H2.
What is already bad will likely only get better.
So this is how people talk themselves into getting long right now. Equity multiples and high yield spreads look entirely too rich right now for a recession. If you're playing for upside here, how much upside are you even getting at these equity multiples unless the fed goes back to easy financial policy, which seems like a very remote possibility in a soft landing case.
I think it's because of V-shaped recovery that we saw during covid. people saw with their own eyes just recently that you can double your money quickly if you buy dips. there hasn't been a prolonged bear market (2+ years) for a while, so people don't fear it anymore. on opposite they're excited to buy dips and make money.
If you take the COVID anomaly out - we are coming off the longest bull run in history. “Buy the dip” is gonna be a hard habit to break. Where this ends I think is pretty certain (market must tank further for either a big recession or the realisation of persistent high inflation). But it takes a long long time to turn a big ship. And people with short term time horizons still gotta make a buck while they can.
I was thinking that too, but who knows, maybe AI and longevity research will spiral us into crazy non-stop market bull run for multiple decades.
S&P 500 offers you 5% earnings yield with some inflation protection. AAA offers you 4.2% with no inflation protection. I think the S&P is a better deal but certainly debatable.
High yield is offering 5.3% but again no inflation protection, and weaker companies with arguably more capital structure risk than the equities of S&P 500 companies. Maybe.
Personally S&P feels like the best risk-adjusted return along that spectrum but curious what others think.
That's true but the earnings yield of the SP500 is subject to a lot more variation than bonds, thus necessitating a higher discount rate, right?
That's certainly what the textbooks say. Not sure how helpful it is in the real world though. Ask yourself this. Say an investment promises you 4% return while another credibly offers you an expected 5% return but with some volatility . . how much volatility would it take to make you choose the 4% return?
I suspect it would take quite a lot, and it would probably require a real possibility of an extended period of <2% returns in order to entice you to take the 4% guaranteed. Especially when you know high inflation will cause a lot of pain to your 4% investment, not necessarily to your 5% investment. But only you can answer that.
3 month T bills are essentially risk free w/r/t inflation risk
Yeah but you only get paid for 3 months with no promise of being able to reinvest at a good rate. 10 year more relevant because it's closer to a period that you might hold a stock that's delivering a nice yield.
Jobs report wasn’t great news for inflation but I think the Fed will become increasingly dovish. If supply chain constraints were as big as a driver of inflation as Fed has pointed to then that issue alleviating May be enough to quell inflation without the need to torpedo job market.
With globalization diminishing now and the escalation of the trade war with China, do we see the supply chain issues healing soon? I've read that cheap imports from China have kept inflation down through low prices but it's unclear if that will continue.
There is no world in which we can bring interest rates back down to neutral rates while unemployment is still at 3.4%. That literally cannot happen. Either unemployment spikes back up to a sustainable level - or interest rates stay high. The equity market is pricing in strong economy (low unemployment) and a drop in rates as if we can have both. We cannot have both.
I agree, it's strange...
Pretty much a novice when it comes to economics, why can’t we have both?
I'm not really sure when this supposed "bear market" will arrive. Looks like boomers were the luckiest bunch, in terms of getting stocks and real estate dirt cheap, and riding an insane bull market that never ceases. Even the massive tech layoffs are really just a rich-cession and represent a miniscule portion of the labor market. People working blue collar jobs are doing better than ever. Service workers like plumbers are quite literally making upwards of $200 an hour.
Yawn... Wall Street is wrong again. I'll put in my prediction just to lock in my supposed foolishness according to everyone else: interest rate hikes are nearly over, disinflation will continue, stock prices will stay relatively flat due to prior high gdp growth and low unemployment. Value and small caps will recover from losses to growth and large caps during this period due to the mean reverting nature of the markets and the value/small cap style premia.
Semiconductors not heavily exposed to China will recover, same for crypto companies not tied to SBF.
Meta will recover short term but decline long term.
The oracle (on mysterious gases emanating from the temple in Delphi) has spoken!
Market manipulation and plunge protection team (half-joking)
These continuation vehicles are interesting it's basically like a giant four year kick the can down the road until the private companies have to actually capitulate and valuations have to correct.
Do you think the capitulation of private company valuations will be what triggers the capitulation in the public equity markets?
I think it is indicative of everything just in a holding pattern / status quo before a step down idk I could be off
https://www.reuters.com/markets/markets-ride-1-trillion-global-liquidit…
Bottomline: Massive buffer of liquidity in the west and addition of liquidity in the east (BOJ/PBOC). The level and rate of change matters.
Bears look like geniuses 1 or 2 out of every 10 years. Long-term holders ALWAYS win in the end. The bearish sentiment on Wall Street won't subside until the market recovers at least half of the drawdown. This drawdown is different from 2008 or Dotcom, where they had massive catalysts to cause capitulations (i.e Lehman going under, or WorldCom fraud etc.)
I lived through both of them. This is a different beast... a slow drawdown (however, the market is still falling 3x faster than the dotcom crash, so don't think it'll last as long.)
All I know is, the rally coming out of this will likely be one of the most aggressive and quickest in history. That's why I'm preparing for, and that's where the big-bucks are made. Difficult for me to see us going into 2024 still in a bear market considering the amount of work we've already done.
Great to hear a damn fresh perspective for once. Everyone and their grandmothers is full bear mode and even dipshits associates and VPs on this site think they're so smart because they're simply reacting to headline news.
I completely agree that the rally coming out of this will be very steep and perhaps even "violent" but upwards. Let me just ask you a question (I know this will be hard to answer but just your opinion): Do you believe the lows are already in back in October and do you believe the rally will start in the next months here or has already begun outside of this minor (last two weeks) correction? Thanks
Nam provident rerum necessitatibus sit et fugit vel. Dolores non eos perferendis enim illo. Tempore voluptatem mollitia autem quis sunt voluptatum. Consectetur non ipsum unde placeat cum laboriosam dolores.
Hic atque libero voluptatum eum soluta. Doloribus suscipit tempora iure deserunt. Aspernatur corrupti odio in a. Facilis dolore tempore modi ad vero provident aut.
Amet ut eveniet quia. Id maiores exercitationem distinctio deleniti. Facilis quidem quo libero aut atque iusto est.
Et sint vitae nesciunt quo molestiae voluptas alias. Magni adipisci odio quos officia. Sunt velit quos ut dolores. Quia porro in in nihil. Commodi voluptates natus qui voluptas maxime fugit vel.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
At ut recusandae odit pariatur quisquam modi veritatis. In dignissimos culpa voluptas laboriosam ex commodi. Qui vel qui facere unde pariatur eos vero velit.
Sit hic officiis quidem quo. Et corrupti magni assumenda.
Aut earum nam id rerum iusto. Ipsum ut quos quis quo ut cumque dolores.
Ut omnis accusamus molestiae odio omnis ut optio illo. Quos omnis at ut molestiae architecto occaecati esse. Id aut pariatur eveniet dolor voluptatum eum.