S&P 500 - Worst Start to a Year Since 1939!

[Kupotea]

I think the market will continue to be surprised by how sticky inflation is. Demand is an issue but the real challenge is supply side and you can't simply turn on the spigot for raw materials, labour, and equipment. Not convinced we're heading for a recession this year but what's to say that 10 year treasuries can't hit 6% this cycle? What does the stock market look like under that scenario with lower profit margins thrown into the mix?

[Parsad]

1 hour ago, Xerxes said:

Sometimes it is fashionable to be a bull, sometimes it is fashionable to be bear and point all the historical anecdotes of bear markets. 
 

I don’t know more than the next person but if inflation has peaked, you will only see it six months from now when you look back and say ahhh that was the peak ! 
 

Reverse wealth effect (stocks going down) + higher interest rate + higher cost for goods/services + higher fuel prices are all having a damping effect on “demand” and that will work itself through the system … lower economic demand means relatively lower inflation. 

 

I think our focus should be on the “rate of change” in inflation and not the “absolute level of inflation”.   
 

 

I agree!  No one saw inflation coming a year ago.  But you had a huge bottleneck in the supply chain, increased pressure on oil and commodities, even more pressure due to the Ukraine war and a shortage of labor.  Combine that with the amount of cash on the sidelines, and you have a perfect storm of inflationary pressure.  

 

The supply chain while still somewhat stagnant is loosening.  Increases in interest rates will have some influence on inflation.  The Ukraine war at some point will fizzle in terms of global worry.  I suspect we'll see a short recessionary environment as markets adjust and then continued steady growth.  Employment is at historic lows...money is flowing...technology is continuing to advance humanity...consumers while adjusting spending, will be earning more.  This is neither 1970, nor 1929...but there may be shades of such periods where we saw some dramatic corrections like 2000-2002 in tech stocks.  

 

In the meantime, I've gone from 50% cash down to 25-30% cash depending on accounts, and will probably put most of the rest to work as stocks get even cheaper.  

 

Cheers!

[Ulti]

https://www.linkedin.com/pulse/popping-bubble-stocks-update-ray-dalio/

[Simba]

I'm starting to buy on the way down. Prices are getting to the attractive category with some positive IRR expectation (Versus absurdity of stocks jumping 100-300% on bull$hit numbers). I find the market is very quick to react to earnings (versus 12-18 months ago, where everything gapped up 30% on air)

 

I'm of the opinion, even if rates headed up hypothetically to 6-8% in a bear case / hyper inflation scenario, stocks would likely still perform great.

 

Own good operators, and the share price shall take care of itself. 

 

If the market valuation truly mean reverses, then you end up in a pre-2013, post dot-com world, of fair multiples with decent IRRs.

 

United States still a great country to invest IMHO. 

 

A lot of noise, and if your a long-term investor (5-10+ year horizon), opportunity fortunes the brave (for stocks that is)

Edited May 7, 2022 by Simba

[Spekulatius]

On 5/5/2022 at 6:34 PM, Thrifty3000 said:

I think it depends on the level of interest expense vs the ability to pay.

It also depends on the rate of inflation. You need to think real interest rates (nominal rates minus inflation). We currently could support double digit interest rates, due to 9% inflation run rate.

[mattee2264]

There is a huge amount of uncertainty so the market is necessarily very reactive and I think that means the range of outcomes is massive.

 

Re earnings: what will earnings look like in a post-pandemic inflationary environment? And if we go into recession this year how low will earnings go? 

 

Re interest rates: how much higher will they go before it is clear the tide has turned with inflation or the Fed figures the damage to the stock market/economy is too great and reverses course?

 

I think earnings could be the bigger factor. Earnings yields have been fairly consistently around 5-6% in the modern era despite the variability in interest rates. 

S&P 500 earnings in 2021 will be around $210. That compares to $160 pre-pandemic. But most likely they represent peak earnings.

 

Big Tech have for some time been able to experience impressive secular growth in a sluggish economy and the pandemic was a massive boon for them. But they are so big that you'd imagine their earnings would not be immune from declines in a recession. Consumer discretionary companies have benefited from consumers receiving stimmies, cutting back on travel, and online shopping out of boredom and with more money going to energy and food consumers will have to cut back. Consumer staples companies could suffer as they are unable to pass on all their cost increases and consumers start thinking about switching to non-branded alternatives. Financials are vulnerable to higher credit losses and a possible housing market correction. Commodities will suffer if demand falls in a global recession. 

 

Wall Street are bringing down their 2022 estimates but they are still higher than 2021. But in an average recession S&P 500 earnings decline around 25% which would get us right back to where we were pre-pandemic and could erase the remainder of the post-pandemic market price gains. 

[scorpioncapital]

Growth is the place to be, always.

Price you pay is hard to get the patience/temperament right.

I would argue very few have the superhuman patience to wait years or decades for the right purchase price for high ultimate return. 

I can see an argument for owning say boring utilities or bond like equivalents then shift out of them into high growth quality companies once a decade or something.

Perhaps this is that time where those who bought the right thing too high will feel some pain (a return to a lower return for their high purchase price) and those who buy at lower prices will be rewarded with the above average higher returns.

Edited May 8, 2022 by scorpioncapital

[Spekulatius]

@scorpioncapital Utilities have been a good performer over the last 2 years. I wonder of the current environment is good for them though. Sure they have some pricing power but a regulated utility has their equities regulated typically at around 10% and the cost of debt is increasing, so their WACC goes up. Will regulators grant them higher equity returns into compensate for that? I don’t know and haven’t really seen any evidence of that.