Is The Bottom Almost Here?

[UK]

Citi: 

 

"Given that we go into recession, historically SPX has never bottomed before the start of the recession. Typically, there are even several months between the start of Fed easing and the bottom in U.S. equities," they wrote in a client note. On the other hand, the S&P 500 has now crossed above the 200 daily moving average, which is "an important technical level." "Technicals related to SPX 200dma are indicating that the bottom may already be in. Equity markets broke more than 3.5% above the 200dma, a level at that we have never seen SPX make a new low from during a bear market," the strategists note.

[Viking]

Well… sounds to me like the Fed is close to a pivot. Regardless, they are no longer hawks. Stock market ripping? Not a problem. Falling bond yields (further out on the curve)? Not a problem. Weakening US$? Not a problem. 

Any crack in the labour market and the Fed is done. Rate cuts later this year?

 

Today, the Fed moved to where the bond market currently is. Super interesting. Sounds like risk on to me.

Edited February 1, 2023 by Viking

[changegonnacome]

31 minutes ago, Viking said:

Well… sounds to me like the Fed is close to a pivot. Regardless, they are no longer hawks. Stock market ripping? Not a problem. Falling bond yields (further out on the curve)? Not a problem. Weakening US$? Not a problem. 

Any crack in the labour market and the Fed is done. Rate cuts later this year?

 

Today, the Fed moved to where the bond market currently is. Super interesting. Sounds like risk on to me.

 

Have to say it sounded pretty close to this - I think dis-inflationary momentum seem to have surprised them...........last shoe to drop to get them to back away from the red interest rates rises button is what they refer too as "non-housing services"......which I agree with Powell........is where the sticky, self-reinforcing above 2% inflation COULD be located in the data set....if you buy my previously outlined theory on wage-price-productivity conundrum.........IMO if non-housing services moves down with any type of momentum in the months ahead then a pause would be appropriate.....if it continues then you get cutting quickly cause the strong disinflationary forces (technology/demographics/whatever) that dominated the 2010's and kept interest rates low is still very much in place. Very interesting indeed.

[Spekulatius]

Regardless of what Powell is saying, they still raised Rates by 0.25% and they pretty much said, they will raise rates again at the next meeting in March. This still does not sound that great to me.

Edited February 1, 2023 by Spekulatius

[TwoCitiesCapital]

13 minutes ago, Spekulatius said:

Regardless of what Powel is saying, they still raised Rates by 0.25% and they pretty much said, they will raise rates again at the next meeting in March. This still does not sound that great to me.

 

Yea - market is noticing that they weren't particularly stressing how easy financial conditions have become over the last few months. Markets view that as the start of the pivot as the Fed had basically made no progress tightening financial conditions in months and doesn't seem bothered by that. 

 

That being said, bond yields were still bid on the long end substantially today. Bond market is still staying this is a policy mistake. I tend to agree.  With key technicals broken (200 DMA as resistance, the downtrend since 11/2021, and the golden cross), we're likely to rally a bit from here, but my intermediate term bearishness is unchanged.

 

The economy can't handle 4-5% rates, the economic picture has been weakening for months, and we haven't given it very long to see the actual effects of these hikes yet. It only gets worse from here regardless of equities do up temporarily. Sell the rip to buy the dip. 

Edited February 1, 2023 by TwoCitiesCapital

[Viking]

33 minutes ago, Spekulatius said:

Regardless of what Powel is saying, they still raised Rates by 0.25% and they pretty much said, they will raise rates again at the next meeting in March. This still does not sound that great to me.

 

The two keys are labour market and services inflation (labour). IF we get a weak labour report the Fed is likely done. Regardless, if the current trends continue, the Fed is done after the next increase in March. The important point is the Fed is largely done with rate increases. The economy needs certainty. People/businesses can then plan and get on with their lives. We now have certainty (give or take a month or so… close enough).
 

Housing stocks (builders and lumber producers) are popping. Metal stocks are popping. Much of the economy has been slowly digesting higher interest rates. And they now know they are peaking on the short end of the curve. The 2 year treasury could be in the low 3% range later this year. Lower rates are a big deal… and further out on the curve they are already down big.
 

The chances that the Fed will get a soft landing just went way up today. Pretty good set up for risk assets. And my guess is most people continue to be under-invested (in stocks). So people got hammered last year and likely sold down their stock positions in December (that stop the pain thing). And they are waiting for markets to crash again so they can get back in. Perhaps stocks slowly keep going higher from here (climbing that wall of worry). Fear will be replaced by FOMO. Sell low and buy high… ouch! Making money in stocks is a pretty tough thing!

—————-

All the fear mongers / Fed haters are screwed. The world (probably) isn’t going to end. 

Edited February 1, 2023 by Viking

[changegonnacome]

I think the thing that they cant believe and either can I is that in a full employment/output economy with sleepy productivity growth perhaps sub-1% (BLS data out tomorrow on productivity) that wage increases annualized in the 4%+ range would NOT result in over 2% inflation.....math would say you land or get stuck at least 3-4%+ for 2023.....and its only a softening of labor market conditions out into 2024 that temper wage growth enough. 

 

Chart below IMO is the key - you just don't get stable prices on domestically produced goods and services writing yourself these types of wages increases in a highly developed low productivity growth economy.

 

https://www.bls.gov/charts/employment-cost-index/compensation-in-private-industry-and-state-and-local-government-3-month-percent-change.htm

Edited February 1, 2023 by changegonnacome

[Spekulatius]

10 minutes ago, Viking said:

 

The two keys are labour market and services inflation (labour). IF we get a weak labour report the Fed is likely done. Regardless, if the current trends continue, the Fed is done after the next increase in March. The important point is the Fed is largely done with rate increases. The economy needs certainty. People/businesses can then plan and get on with their lives. 
 

Housing stocks (builders and lumber producers) are popping. Metal stocks are popping. Much of the economy has been slowly digesting higher interest rates. And they now know they are peaking on the short end of the curve. The 2 year treasury could be in the low 3% range later this year. Lower rates are a big deal… and further out on the curve they are here.
 

The chances that the Fed will get a soft landing just went way up today. Pretty good set up for risk assets. And my guess is most people continue to be under-invested. So people got hammered last year and likely sold down their positions in December (that stop the pain thing). And they are waiting for markets to crash again. Perhaps stocks slowly keep going higher (climbing that wall of worry). Fear will be replaced by FOMO. Sell low and buy high… ouch!

We might be done raising in March, but then we still have the "keep rates up for longer" to prevent inflation flareup. If we do keep the 4.5% short term interest rate for a while, some income investments are  attractive relative to stocks.

 

With this jump in equities, i could pretty much lock in the gains and go all cash /MM/STIPS and lock in an almost 10% gain for the year. (from gains and expected interested from MM accounts). Tempting.

 

Not that I would do it, but the opportunity cost from going into cash is not as large any more as it used to be under ZIRP.

Edited February 1, 2023 by Spekulatius

[Sweet]

2 hours ago, UK said:

Citi: 

 

"Given that we go into recession, historically SPX has never bottomed before the start of the recession. Typically, there are even several months between the start of Fed easing and the bottom in U.S. equities," they wrote in a client note. On the other hand, the S&P 500 has now crossed above the 200 daily moving average, which is "an important technical level." "Technicals related to SPX 200dma are indicating that the bottom may already be in. Equity markets broke more than 3.5% above the 200dma, a level at that we have never seen SPX make a new low from during a bear market," the strategists note.

 

We had a recession already.  We had -1.6% and 0.6% in Q1 and Q2 respectively last year.  That's always been considered a recession....

[Viking]

19 minutes ago, changegonnacome said:

I think the thing that they cant believe and either can I is that in a full employment/output economy with sleepy productivity growth perhaps sub-1% (BLS data out tomorrow on productivity) that wage increases annualized in the 4%+ range would NOT result in over 2% inflation.....math would say you land or get stuck at least 3-4%+ for 2023.....and its only a softening of labor market conditions out into 2024 that temper wage growth enough. 

 

Chart below IMO is the key - you just don't get stable prices on domestically produced goods and services writing yourself these types of wages increases in a highly developed low productivity growth economy.

The problem is 8% inflation. That causes all sorts of economic and societal problems. 3% inflation is needed… over many years that solves our too much debt problem. The pivot today signals the Fed is OK with some inflation… They also don’t want to return to disinflation and potential deflation.
 

Bottom line, great place to be for stock investors. Bond investors are also going to make out like bandits as rates across the curve normalize (fall). Volatility. Active management. Are we back to normal financial markets for the first time in a long time?

Edited February 1, 2023 by Viking

[Spooky]

1 hour ago, Viking said:

Well… sounds to me like the Fed is close to a pivot. Regardless, they are no longer hawks

 

I listened to a replay of JPow's remarks and they still seem pretty hawkish to me (at least by the words of the statement). Saying they are going to need to raise more to bring inflation down to their 2% target and it's still to early to conclusively say that inflation is vanquished.

 

Not sure where the narrative of a Fed pivot is coming from but there could be a few more twists to this story.

[Viking]

15 minutes ago, Spekulatius said:

We might be done raising in March, but then we still have the "keep rates up for longer" to prevent inflation flareup. If we do keep the 4.5% short term interest rate for a while, some income investments are  attractive relative to stocks.

 

With this jump in equities, i could pretty much lock in the gains and go all cash /MM/STIPS and lock in an almost 10% gain for the year. (from gains and expected interested from MM accounts). Tempting.

 

Not that I would do it, but the opportunity cost from going into cash is not as large any more as it used to be under ZIRP.

This update from Morgan Stanley was an eye-opener for me. Their forecasts have been pretty good over the past year.
 

“Given these developments, we have revised lower our Treasury yield forecasts. We see the 10 year Treasury yield ending the year near 3%, and the 2 year yield ending the year near 3.25%. That would represent a fairly dramatic steepening of the Treasury yield curve in 2023.”

 

https://podcasts.apple.com/ca/podcast/thoughts-on-the-market/id1466686717?i=1000597464912

[changegonnacome]

29 minutes ago, Spekulatius said:

With this jump in equities, i could pretty much lock in the gains and go all cash /MM/STIPS and lock in an almost 10% gain for the year. (from gains and expected interested from MM accounts). Tempting.

 

Dont tempt me! I'm up 13% YTD.......find rock solid fixed income instrument to absorb NAV with 11 month runway and yield to maturity of 5% which doesn't seem too far fetched......and 2023 return is 18%......secured on Feb 1st 2023 

[mattee2264]

I think it is pretty clear now that the Fed has no real interest in suppressing stock prices to try and tighten financial conditions. Equities now have a free licence to melt up. 

[Spekulatius]

50 minutes ago, changegonnacome said:

 

Dont tempt me! I'm up 13% YTD.......find rock solid fixed income instrument to absorb NAV with 11 month runway and yield to maturity of 5% which doesn't seem too far fetched......and 2023 return is 18%......secured on Feb 1st 2023 

I just checked and up ~9% so far. Get 4-5% on MM or other income funds and I can do 13-14% without taking any further risk and see how this unfolds.

 

I did some more sales and sold AMZN in my tax deferred accounts AH. That stuff has all been ripping.

[changegonnacome]

16 minutes ago, Spekulatius said:

I just checked and up ~9% so far. Get 4-5% on MM or other income funds and I can do 13-14% without taking any further risk and see how this unfolds.

 

I did some more sales and sold AMZN in my tax deferred accounts AH. That stuff has all been ripping.

 

Lets do it!!!! We can figure out what to do about 2024 returns for the next 11 months 

[Simba]

6 hours ago, Viking said:

 

The two keys are labour market and services inflation (labour). IF we get a weak labour report the Fed is likely done. Regardless, if the current trends continue, the Fed is done after the next increase in March. The important point is the Fed is largely done with rate increases. The economy needs certainty. People/businesses can then plan and get on with their lives. We now have certainty (give or take a month or so… close enough).
 

Housing stocks (builders and lumber producers) are popping. Metal stocks are popping. Much of the economy has been slowly digesting higher interest rates. And they now know they are peaking on the short end of the curve. The 2 year treasury could be in the low 3% range later this year. Lower rates are a big deal… and further out on the curve they are already down big.
 

The chances that the Fed will get a soft landing just went way up today. Pretty good set up for risk assets. And my guess is most people continue to be under-invested (in stocks). So people got hammered last year and likely sold down their stock positions in December (that stop the pain thing). And they are waiting for markets to crash again so they can get back in. Perhaps stocks slowly keep going higher from here (climbing that wall of worry). Fear will be replaced by FOMO. Sell low and buy high… ouch! Making money in stocks is a pretty tough thing!

—————-

All the fear mongers / Fed haters are screwed. The world (probably) isn’t going to end. 

 

I like this view.

My own take to add (all anecdotal)

 

1. Stocks are emotionally hardest to own after a bear market (as we had in 2022)

2. Stocks usually perform the best after large sell offs 

3. Market rallies tend to be swift (as we have already seen YTD, with S&P 500 up 8% in a short 31 days to start the year).

 

I don't really follow inflation, but was never in the camp this was going to kill stocks, and I generally believe that corporations pass on prices to consumers, and in fact benefit earnings, so owning stocks is an inflation protector (and historically stocks returned above inflation anyways).

 

 

 

Edited February 2, 2023 by Simba

[mattee2264]

The one thing that does worry me a little is that if disinflation is proceeding faster than expected and without the Fed having to take interest rates as high as they thought they would have to it could be a sign that the economy is slowing down rapidly and there is still the possibility of an overshoot and a hard landing. 

 

Also while a lot of the price increases have already gone through I don't think we are done with wage increases. Prices have increased by roughly 20% since the pandemic and most people haven't seen 20% pay increases over the same period. Wage bargaining is an annual event and with the money illusion it can take some time for people to realize their real wages have fallen and adjust their wage expectations accordingly. You just have to look at all the strikes in the UK with public sector workers demanding 20% pay increases. It would be easier to restrain wage inflation if unemployment was high and people were worried about losing their jobs. But the labour market remains pretty tight with labour shortages in many areas. 

[dealraker]

8 hours ago, Simba said:

 

I like this view.

My own take to add (all anecdotal)

 

1. Stocks are emotionally hardest to own after a bear market (as we had in 2022)

2. Stocks usually perform the best after large sell offs 

3. Market rallies tend to be swift (as we have already seen YTD, with S&P 500 up 8% in a short 31 days to start the year).

 

I don't really follow inflation, but was never in the camp this was going to kill stocks, and I generally believe that corporations pass on prices to consumers, and in fact benefit earnings, so owning stocks is an inflation protector (and historically stocks returned above inflation anyways).

 

 

 

Simba...that last paragraph?  Correct.

 

 

 

 

Edited February 2, 2023 by dealraker

[SHDL]

Agree that’s an important point. I’m personally not particularly bullish on stocks generally but I’m nevertheless “fully invested” (with whatever is left after buying RE) because I’m pretty negative on fiat currencies. I really think governments have now re-discovered the joys of seignorage and they’ll keep using it every time something bad happens to the economy, the end result being persistently high inflation. Looking at the price action in gold for instance I get the sense that the market is starting to take notice.

[Spekulatius]

Inflation benefits some business, but hurts most. Yes capital light insurance, distributors or Visa, Mastercard like business benefit, but  many service companies have issues for example.

 

Some shortages juiced profit margins (PC and automobiles being a great example) , but those are going away and get replaced by supply gluts or demand and supply chain whiplashes.

[SHDL]

30 minutes ago, Spekulatius said:

Inflation benefits some business, but hurts most. Yes capital light insurance, distributors or Visa, Mastercard like business benefit, but  many service companies have issues for example.

 

Some shortages juiced profit margins (PC and automobiles being a great example) , but those are going away and get replaced by supply gluts or demand and supply chain whiplashes.

 

Yes things can get tricky in the short term when inflation suddenly accelerates but my thinking is that if we were to settle down to a long term regime where the price of everything keeps going up 5% per year like clockwork then revenues, costs, and cash flows should all keep going up 5% per year even if there is no real growth.

[TwoCitiesCapital]

2 hours ago, dealraker said:

Simba...that last paragraph?  Correct.

 

 

 

 

 

Except it isn't. PMIs have outpaced CPI fori that and corporate margins are contracting. It's fine to have a theory that businesses can pass inflation through, but it's a whole other thing to continue believing in that theory when evidence shows it's incorrect. 

 

1 hour ago, Spekulatius said:

Inflation benefits some business, but hurts most. Yes capital light insurance, distributors or Visa, Mastercard like business benefit, but  many service companies have issues for example.

 

Some shortages juiced profit margins (PC and automobiles being a great example) , but those are going away and get replaced by supply gluts or demand and supply chain whiplashes.

/\/\ this

 

56 minutes ago, SHDL said:

 

Yes things can get tricky in the short term when inflation suddenly accelerates but my thinking is that if we were to settle down to a long term regime where the price of everything keeps going up 5% per year like clockwork then revenues, costs, and cash flows should all keep going up 5% per year even if there is no real growth.

I agree in principal. Now find me any time, any country, where inflation was "stable" once exceeding 4-5%. I don't believe it has EVER happened. Certainly not in the U.S. 

 

Realistically speaking, the historic precedent once inflation exceeds 4-5% IS these whipsaws higher and lower. 

[TwoCitiesCapital]

16 hours ago, mattee2264 said:

I think it is pretty clear now that the Fed has no real interest in suppressing stock prices to try and tighten financial conditions. Equities now have a free licence to melt up. 

 

I think the direction might be right in the short term, but I caution against getting excited for anything longer than a month or two. 

 

2018 also had a very strong January. And then equities were broadly negative at the end of the year. 

 

The Nasdaq had double digit returns in both Jan 2000 and Jan 2001 and ended both years significantly negative. People are letting 1-2 months of strong equity returns cloud the perception of the longer term view which has been one of economic deterioration for months now. 

[mattee2264]

I think it is bullish that markets no longer need to fight the Fed. Last year there was a feeling that the Fed was intentionally trying to suppress markets to tighten financial conditions deliberately escalating the hawkish tones after every bear market rally. Recent press release makes it clear they don't really care what happens to markets in the short term. 

 

However I do feel that at 4100 SPY markets are pricing in a strong probability of a soft landing. Not sure that confidence is quite warranted. Although in fairness the market correctly called the V shaped recovery from COVID while most economists were talking a depression.