PWA 2022 Year-End Letter, Part 4: Short-Term Bull and Bear Arguments -- And -- Long-Term Setups

We've probably spent ample time of late on our view that the current bear market likely has more downside to play out before the coast is clear, but I'll go ahead and offer up the 3 main (most obvious) fundamental bullet-points explaining why that makes sense to us:

• Odds favor recession (albeit mild in our present view) in 2023.
• Corporate earnings estimates (embedded in stock prices) don't appear to reflect recessionary conditions.
• The Fed, and the ECB, in particular, continue to voice their commitment to tighter monetary policy in order to tame inflation, despite rising recession risk.

If, on the other hand, as some strategists contend, should factors such as the relative strength of the consumer (read service sector activity), a still-strong labor market, inflation continuing to abate, China reengaging with the global economy (although that one could get initially dicey as covid cases spike) and so on, ultimately overcome otherwise recessionary forces, then, in fact, the worst may indeed be over... Which is a possibility we're open to.

But, before we move on, allow me to state the bears' counterpoints to that last paragraph:

PWA 2022 Year-End Letter, Part 3: Structural Change -- And -- Ideology Can Get in the Way

Lots on my mind as we close out a telling 2022... Clients and regular readers know that in our view we are living the early stages of what we'll call a structural regime change... In essence, the world has crossed the threshold that leaves behind a 4-decade long "capital-friendly" regime, which -- as capital-friendly regimes historically do -- culminated in extreme (and politically unsustainable) wealth and income inequality, and enters a new "labor-friendly (read populism)" regime.

 

As this reality evolves, many challenges will emerge, persist (divisiveness -- both intra and inter-nationally -- is a hallmark of the populist ethos), and ring downright depressing to many... But, make no mistake, it comes rich with attractive macro investing opportunities.

PWA 2022 Year-End-Letter, Part 2: The Economy

In June 2017, after decades of parsing volumes of economic data, constructing our attendant views and applying them, we decided to create our own index and formally track the data we felt were most telling in terms of giving an on-the-ground, real-time assessment of general conditions.

We then ran it back a ways to determine how revealing it would have been over the past couple of cycles.

PWA 2022 Year-End Letter, Part 1: Still Icy Waters For Now, But Warmer Temps (in spots) on the Horizon

We'll begin this year's final message with a look back at the market metaphors we explored in last year's Year-End Letter, Part 1.

But first (as in previous Part 1s) we'll list what we believe to be the essential characteristics of the world’s best portfolio managers -- the traits we everyday strive to embody:

Bonus Chart of the Day: "Most Anticipated Recession in History"

As a follow-on to our earlier post, and to my concern over being in the consensus (by the way, our view on next year wasn't consensus when our economic assessment called for it back in August), here's from BCA Research:

Chart of the Day: Pre-Election History Conflicts With Our First Half 2023 View

As clients and regular readers know, we're not bullish on US stocks (as a group) the first half of next year, but we are open to all possibilities.

As I've stated recently, my greatest hesitation on our economic and market view for early next year is that it seems to have become consensus... I.e., all too often (but not always, mind you) the consensus -- particularly when it becomes overwhelming -- gets it wrong.

Stock Market Snapshot and the Go-Forward Setup 12/21/2022 (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Japan's Big Surprise!

Yesterday's late-session action saw stocks moving off their lows, with a bit of momentum that I saw (per the charts) as a technical signal that looked to carry into the overnight futures session and, likely, into this morning's cash session.

Morning Note: Careful With (reacting to) That Headline

Before we get into this morning's brief message, two heads up:

1. Blog posts will be a bit sparse for the next couple of weeks as I devote my writing time to our year-end message.

2. Clients, today is "ex-dividend" day for the majority of the ETFs in our core portfolio... So, if you're one to frequently check your account, you'll note that today's move won't jibe (it'll be lower) with asset markets, as shares will reflect the dividend payout... This Thursday you'll notice a difference as well (it'll be higher), as those dividends are credited to your account(s).

Morning Note: Non-Fundamental Factors and a Quote to Keep in Mind

In yesterday's video commentary I -- in reference to the abundance of short-dated options being traded of late, and to today's massive expiration -- suggested that factors other than fundamentals, and other than the retail trader may be aware of, can move the market in a big way, in a hurry.

Economic Update: Consumer Spending Sustainability in Question (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Stock Market Snapshot: Are Stocks Beginning to Price Recession Risk?

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Key Highlights

So, the Fed delivered the expected .50% rate hike, but, on balance, didn't deliver the bulls the assurance that they're near-done with their quest to put the screws to what, in key areas, remains stubborn, or sticky, inflationary pressures... Hence, stocks finished the day moderately lower.

Morning Note: It's ALL About the Fed, Now and Next Year

While the CPI report inspired yet another wild day of action in equity markets, when we get right down to it, it's really all about what transpires during J. Powell's post-Fed-meeting press conference later today.

In fact, allow me to rephrase the above: Yesterday morning's softer than expected CPI report initially got traders thinking that Powell will play the dove tomorrow, until, that is, they, perhaps, realized that the stuff Powell says the Fed's focused on remained elevated in price, and that a rallying market defies the Fed’s desire to keep financial conditions tight, and that last week's PCE read (which came in hotter than expectations) is the Fed's preferred measure, yada yada. 

The Feel From Small Business

This morning's release of the National Federation of Independent Business (NFIB) -- i.e., small business -- Optimism Index (an input to our "PWA Index") jibes pretty well with our present assessment of overall general conditions, and with this morning's inflation read from the CPI report.

Recall that we see odds favoring recession in 2023, although, at this juncture, we see it to be mild by historical standards.

Morning Note: Stay tuned...

While we labeled the short-term technical setup for stocks "ambiguous," we noted that the technical setup for bonds, and for the dollar, leaned bearish for stocks, and, per yesterday's note, overall positioning suggested that traders were on-balance betting on further declines after last week's drubbing.

Well, the thing about positioning, particularly when it's notably off-sides, is that its unwinding can bring on quite the violent market reaction... This morning is no exception (monster rally!), for, as we suggested in yesterday's note:

History, and today's price action (except in the VIX), says CPI's coming in cool tomorrow (not a prediction btw)...

Fascinating action in stocks today! 

If you told me at the beginning of today's session that the VIX (tracks implied volatility in SP500 options contracts) was going to close up 9.51%, I would've guessed that stocks would take a significant hit on the session. I mean the two have carried a daily negative correlation coefficient this year of -0.8 (that's negative!).

Well, I would've guessed resoundingly wrong! The S&P 500 closed up 1.43% on the session!

Morning Note: The Bulls Need Inflation Cooling and Powell Cooing

This week will be, to put it mildly, interesting... CPI Tuesday, Fed decision and, most importantly, Powell's press conference Wednesday, and then the largest options expiration of the year come Friday... Oh, and not to mention, the European Central Bank and the Bank of England both hold their policy meetings on Thursday.

Economic and Stock Market Snapshot: Signals From the Dollar & Bonds

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: A Virtual Tossup for the Short-Term Equity Market Setup

Last evening's log entry:

12/8/2022

Tomorrow’s PPI number, and next week’s CPI print – while some of the data suggest they could very well come in soft – with regard to equities, it’s all about how they score relative to expectations, and the extent to which traders have price in the consensus bias ahead of time.

Morning Note: The Good Old Days

I'm having to stretch my thinking this morning to come up with something that isn't just a repackaged repeat of my most recent messaging... And, alas, it hasn't yet been a week since our last highlights-of-recent-messaging post... 

So, given some of the conversations I've been having of late with folks who seem gloom-ridden by the current state of political and geopolitical affairs, I'm thinking it's as good a time as any to offer up an essay I penned several years ago in an effort to shine some positive light on otherwise gloomy global setups.

Stock Market Snapshot (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Never Cut and Dried

While yesterday looked a lot like Monday in terms of the move (down) in the S&P 500, the signaling from some other asset classes was markedly different.

For example, Monday saw gold and treasury bonds get whacked every bit as much as stocks, while yesterday, as stocks continued to get shellacked, the 2 turned in nice gains. 

Morning Note: What a Difference a Data Point Can Make!

So, China ramps up its own breakout from covid restrictions and the ISM US Services Index comes in (yesterday) at a surprisingly optimistic 56.5 (above 50 denotes expansion)!

Morning Note: Equity Market Conditions Remain Negative

According to the latest scoring of our own Equity Market Conditions Index (EMCI), the go-forward equity market setup, while still net-negative, has improved a bit over the past month.

Here's the summary from our internal report:

Today's Log Entry

From our internal market log:

12/3/2022

The near-term outlook for equities has grown quite fuzzy… 

We anticipated the strong positive move off of the October low, but defined it as yet another bear market rally, doomed to die near the 200-dma and the bear market trend line… Which is precisely where the SP500 sits today.

Economic and Stock Market Update: Recession Risk Rising (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Key Highlights -- And -- November Wage Data

Here are some key highlights from our latest messaging herein:

Morning Note: Dovey

Last night's log entry:

11/30/2022

Fed-speak right up to the day before Powell’s Brookings speech today was explicitly about smaller (than 75 bps) hikes going forward, although with ultimately a notably higher terminal rate when it’s all said and done, and extremely low odds of a rate cut in 2023.