The smartest guys on Wall Street remain bearish. Michael Hartnett at BofA:
The Price is Right: positioning uber-bearish but techicals at one-yard line; NYSE Composite (NYA Index) best Wall St barometer (US stocks + ADRs + bond ETFs) at 14k = 200-week moving average + highs in ‘18 & ’20 (Chart4 & 5); big break below 14k & traders set to target ’18 lows of 11k as bear morphs into crash.
Tale of the Tape: S&P 500 entered a bear market on June 13, the 20th bear market in the past 140 years; average peak to trough bear decline = 37.3%, average duration 289 days; history is no guide to future performance but if it were, today’s bear market would end on Oct 19, 2022 (35-year anniversary of Black Monday) with S&P 500 at 3000; good news. Avg bull market duration is 64 months with 198% return, so next bull sees SPX at 6000 by Feb’28.
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The Biggest Picture: 124 global rate hikes in ‘22 (Chart3); Fed tightening always “breaks” something (Chart2); bull markets in US$ and commodities, longs in big tech, pharma, defence, most vulnerable to “credit event”, US recession (Wall St leads Main St–Chart 6), last leg lower.
Hughie Green: inflation shock (started H2’21)…rates shock (H1’22)…recession shock (H2’22–Charts 10 & 11) + crash (not quite done yet)…once all done and dusted in H2, opportunity knocks; we say at SPX 36k nibble, at 33k bite, at 30k gorge; opportunities in H2 for 2023 bulls…small cap & real assets (inflation), EM (dollar debasement), industrials (infrastructure), Asian consumer, and at lows best strategy humiliated “60-40” strategy.
Flows to Know: largest outflow since Mar’20 from HY bonds ($7.8bn), bank loans ($2.1bn), munis ($4.9bn); 1st inflow to EM equities in 6 weeks ($1.3bn); largest inflow to US small cap since Dec’21 ($6.6bn), to US value in 13 weeks ($5.8bn), to tech in 9 weeks ($0.8bn); financials outflows 12th straight week ($1.6bn)…biggest outflow since Feb’19.
Big Flow to Know: for every $100 of inflow since Jan’20, there has been $35 of outflow from IG + HY + EM debt vs $0 from equities (Chart12); capitulation has been in credit (Charts7-8) and crypto (Chart9) not stocks–why we worry equity lows not yet in.
BofA Private Clients: $2.9tn AUM…62.3% stocks (lowest since Jan’21), 18.4% bonds(highest since Mar’21), 12.1% cash (highest since Dec’20); private client ETF buying past 4-weeks show preference for“yield”; confirming lack of full capitulation in stocks…for every $100 of equity inflow since Jan’21 in GWIM…$6 of outflow.
BofA Bull & Bear Indicator: 0.0 from 0.2; Bull & Bear Indicator previously fell to 0 in Aug’02, Jul’08, Sep’11, Sep’15, Jan’16, Mar’20; when B&B has previously hit 0, unless double-dip recession (2002) or systemic event (2008/2011), 3-month returns strong.
BofA Global Breadth Rule: at-87% basically at contrarian “buy” signal level (>88% of equity indices trading <50d & 200dma); markets painfully oversold, so ripe for rally, but until rates shock can certify inflation shock over, rallies will likely be sold.
JPM has been terrible during this sell-off but one of its traders is better as he calculates earnings downgrades:
I actually think we are past inflation at this point. The only thing confirmed yesterday is that the Fed will (continue) to do whatever it takes to get inflation back to target. If that means slowing the economy to a halt and crashing the stock market, so be it.
The negative pre-announcements are piling up by the day, and investors are continuing to take their ’23 numbers lower. By my read what was $250 for ’23 EPS is now closer to $225 on buy side numbers and even that is a moving target.
At $225 we are trading at ~16.5x which is not cheap, especially with the E moving lower and a 3.5% 10 year.
Positioning is light, but light means own defensive / low beta /quality, lower nets, and lower leverage but how many investors are actually short?
I don’t know about what the rest of today brings but directionally still feels lower to me. I do think as we get to Q4 we will:
Have seen the impacts of QT;
Hopefully seen inflation peak and;
Likely see a strong showing from the Republicans in the election which sets us up well for an end of year rally…. Questions is just off of what base.
the question of where NTM EPS will land is interesting when we turn to poor old Goldman Sachs which has gone from perma-bull to lagging bear:
Dragged down by concerns of slowing growth and an increasingly hawkish Fed, the S&P 500 this week officially entered bear market territory. Following last Friday’s upside CPI surprise and an uptick in long-term inflation expectations, the Fed hiked 75bpon Wednesday, in-line with market pricing. Our economists now expect the Fed to expedite their return to a neutral policy stance of 3.25-3.5% by delivering a 75 bp hike in July followed by a 50 bp hike in September and 25 bp hikes in both November and December. Futures markets now expect 219bp of tightening over the next 12 months. Bond markets have also reflected the hawkish pivot as real 10-year yields have moved upwards to 0.7%, and 2-year yields have shot up to 3.1%, just below nominal 10-year yields, which currently stand at 3.3%.
The S&P 500 has declined by 24% to 3667from its all-time high on January 3rd. Since 1950 there have been 11 previous bear market episodes (Exhibit 1). After entering a bear market, the index typically fell for an additional 1-2 months before reaching a trough. The median peak-to-trough decline during these bear markets equaled -34%. In the 4 bear market episodes that were not followed by a recession within the subsequent 12 months, the median 6month return after falling into bear market territory was +16%. In the remaining 7 episodes that were followed by a recession, the median 6month return for the index was -7%. This year’s path into bear market territory has been especially volatile when compared with previous selloffs. A hallmark of this year’s volatility has been the frequency of sharp price moves at the index level. Roughly 20% of trading days this year have seen the S&P 500 experience a price move greater than 2%(vs. an average of 8% of annual trading days during the past 20 years). In 2022, the VIX ha saveraged 26, peaked at 36, and now registers 33. Although this year’s VIX readings may appear low relative to readings of 80+during the GFC and March 2020, our volatility strategists have shown that current and persistently high levels of volatility are in fact elevated compared with previous selloffs.
Despite the bear market, the S&P 500 does not appear to be fully pricing a recession. Equity returns imply a slowdown in economic growth rather than a recession. Defensives have outperformed cyclicals during the past month and the pair now trades at a level consistent with a pace of real US economic growth of roughly 1%, in line with the most recent reading of our economists’ US Current Activity Indicator (Exhibit3). In terms of valuations, we discussed in last week’s Kickstart how multiples are far from depressed. The S&P 500 YTD decline has dragged the P/E multiple for the index from 21x to 16x, which still ranks in the 64th percentile of valuations going back to 1976. For context, the P/E narrowed to 13x in the recession of 2020 and fell to 9x in the recession of 2008.
Notice that Goldman is yet to adjust downwards its NTM EPS and it then reads market pricing as confirming no recession. The investment banks are not the be-all and end-all of NTM EPS but they are a very big part of it.
In short, Goldman is trying to look out the window but the light inside means it can only see itself.
I expect a nasty recession as the reverse ‘bullwhip effect’ drives a big inventory rundown. Earnings are going to fall on both weak demand and crushed margins so it’ll be a goodly drawdown for EPS.
MB Fund remains very underweight equities, tilted to quality and defensives, accumulating bonds as they sell, and very overweight cash.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
