The Market Ear has some good charts to digest:
Is this the bottom?
Oppenheimer “Market Bottom Checklist”
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Now do Depression…
Equities normally fall 30% in a recession, meaning that we are sort of 75% there…Now do depression…
20% further downside?
If real 2Y swap rate goes to zero, stock market sell-off still has 20% to go
Fastest valuation compression ever
We’ve just witnessed an extremely rapid and substantial contraction in P/E multiples (which follows a previous extremely rapid and substantial expansion). The question many will ask: “is it cheap yet?”
S&P500 “normal to cheap”
Current stock P/E levels have become “normal to cheap” at 18x trailing Earnings, and 15-16x forward Earnings. This is a level very similar to those hit in Q4 of 2018, and 2002-03 recession. That valuation level takes us back to the 2013-14-15 era, and a long-term view of S&P500 earnings growth shows a surprising consistency of 8.6% CAGR.
Not a bottom on trailing
On average, the trailing P/E ratio trades at 11.7x when a bear market bottoms (with a historical max/min of 5.7x-17.6x). Current trailing P/E for the S&P is about 18.5x. However, note that “E” is a moving target.
More severe than average
The current bear market selloff has been more severe than average
More than half of stocks below COVID lows
54% of S&P 500 stocks are back below their pre-Covid highs even though the index itself is still 7.5% above its pre-Covid high.
Sentiment approaching 08 levels
With no lack of folks predicting further downside, and sentiment finding ways to crawl ever-lower, one should try to be extremely cognizant of when the market’s fortunes inevitably improve. However, it’s unlikely to happen due to sentiment alone. Jefferies: “Despite the fact that AAII Bull-Bear is nearing levels that have tended to mark bottoms, we point out that the last time the 12WMA was this negative was in March of ’08, when the SPX was still 1Y and ~50% away from its trough. So while we may have seen the majority of the slide, sentiment alone doesn’t mean it’s through”
The interesting relationship between the labor market and the stock market
Every cycle is a bit different, but one thing that sticks out is an interesting relationship between the labor and stock market. For each of the last 6 economic cycle/recessions, the 4WMA in initial jobless claims has marked the bottom for stocks with stunning accuracy. When IJCs peak and begin a downtrend, the SPX invariably has marched higher. So where are we on that path? Not very far. IJCs may have made a low in April and turned up, but in the past it has taken anywhere from 5M to ~3Y thereafter to make a peak, not counting the lockdown.
2002 trajectory remains the base case
So far the 2002 NASDAQ analogy has worked very well. Selling violent squeezes is an art itself, but bounces can also be interesting plays. Let’s see how things develop post FOMC and if we resume the “base case” trajectory with the “grinding” bear continuing to create huge frustration and p/l pain.
I don’t think that we’re there yet but I will say that we’ll get there sooner rather than later. Why are stocks falling so fast?
There are the obvious causes of a tightening Fed, declining COVID distortions, war in Europe and energy shocks plus the Chinese domestic demand issues.
But, I put the speed down two factors:
- Speed has typified this cycle from the beginning. We have seen crashes down, crashes up, bubbles and busts, huge inventory cycles, and immense geopolitical paradigm shifts, all in the space of little more than two years. It is the nature of a global health shock and extreme stimulus response to do this. So I expect that defining speed to continue as inflation runs riot, the Fed chases it, and economies collapse into recession shockingly fast.
- Second, the underlying global economy is still utterly defined by debt-driven growth. So such a cycle by definition shocks the global balance sheet. First with windfalls and then with a scale of repayments that it cannot handle.
Put these two together and we get radical upside then down for markets at astonishing speed.