Its Over

Originally posted by 1ronnie: ↑

Markets are facing a narrative shift from inflation (peak inflation) to growth concerns (not fully accepting a recession yet) and bond markets are quick to be first off the cab to adjust downwards. But as I pondered, AUD , DXY and Gold are all sending a different message. If rates are coming off, you would expect DXY to go lower and AUD and Gold to go higher, not down. Bill Ackman thinks the bond market has got it wrong, remember bond traders that got killed can't wait to see the end of the rut for bonds, and bonds go higher when yields drop. As I replied to you before, while the data seems to show peak inflation, I think inflation isn't coming down as hard as hoped for and could remain protracted for longer, you see that in the oil price remaining high , and probably not down enough to suggest an early Fed pivot let alone a market expectation of rates diving down in Q1 2023. Of course if and when we get a systemic event, then all that changes and we should expect a Fed pivot rather quickly. But as I read before, it makes sense that what the Fed is doing now is building rates high enough so they can future ammo in their monetary policy to reduce rates when we face any economic adversity. Otherwise ZIRP could go into NIRP (negative interest rate policy) like the EU.

As for PE, so far we have seen PE contraction from high 20s to 16x or so in the US, and this contraction can get worse if we get a deeper bear market or if the Fed breaks something. The next is to see where the E lands because at this point, analysts have yet to revise downwards their estimates by much. There are many headwinds that are likely to pressure the E for US major companies -
1) margin compression from higher inflation/input costs 2) supply chain factors stymie revenue growth 3) revenue impacts from Russia (cessation of business) and China (lockdowns and slowdown) 4) foreign exchange impact- higher USD cause foreign income to be less in USD terms 4) demand destruction and accelerating economic slowdown adversely impacting forward guidance 5) higher interest rates biting into higher leveraged companies 6) write downs/offs (from bad investments)- all these would likely pressure E but the question is to what degree, and we should know this in a few weeks. That could be the set up for where the market heads next, but we also need to be careful not to read too much in results that are more robust than expected because it could take more time for these factors to manifest themselves. The other factor that should pressure stock prices is an expected reduction in corporate buybacks - with the exception of those with lots of cash reserves, you'd expect many to adopt a more conservative to preserve cash hoard or pay off loans instead when the going gets tougher instead of buying their stocks.

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Thanks very much for your detailed answer.