Sunday, December 4, 2022

Today's Log Entry

From our internal market log:


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.

The momentum and the breadth of the move, along with a Fed who suddenly seems concerned with tightening too much, has me flashing back to 2020, where I had high conviction that the rally off of the March low would ultimately prove to be of the bear market variety as well… Thing is, I turned out to be dead wrong.

As it turned out, the market simply would not break amid the combined support of both fiscal and monetary policy – aggressively (historically-aggressively) applied in both cases.

So, from a policy perspective, that  2020 setup is clearly not the setup we’re presently facing.

Plus, the economy back then was suffering the swiftest, and the most severe, recession in history.

So, from a cyclical, as well as a policy, perspective – in that we’ve yet to enter recession, gridlock will hamper any unscheduled fiscal stimulus, and the Fed is currently engaged in rate hikes and QT – the setup today is notably different.

And the inflation dynamic today is not only vastly different than it was in 2020, it’s like nothing we’ve seen since the early 1980s… And, clearly, we’re not about to embark on a new capital-friendly (disinflationary) era that gets underway amid a markedly low/favorable debt-to-gdp backdrop, as was the case in 1980 – quite the opposite in fact! Plus, we don’t have the likes of P. Volcker at the helm of today’s Fed – although, frankly, there’s no way Volcker could be Volcker today, given the current setup.

Bottom line, given the multi-decade regime shift that is just now underway (from capital-friendly to labor-friendly, and all that goes with it), I am certain that we will be dealing with structurally higher inflation for years to come than, for the most part, “markets” seem to grasp just yet… 

That said, in the meantime, near-term probabilities point to recession during the first half of next year, which will hit corporate earnings and, thus, equity prices, until the Fed pivots aggressively (which they indeed will) and saves the day.

Off the bottom we’ll see fiscal stimulus arrive in the form of already-passed infrastructure investment just as China reenters the scene with huge incentive to get its economy back in growth mode, and its populace no longer desiring to burn the house down*… Which plays wonderfully into our longer-term thesis which favors industrial commodities, industrial and material stocks, and non-US developed and emerging equities (and debt [emerging in particular]).

*Tweet by Hu Xijin this morning: 

Hu Xijin 胡锡进
China state-affiliated media

"China is lifting lockdowns,which will increase chaos in a short time.But such transition won’t be long.I estimate by the Chinese New Year,new adaptability will emerge among people, confidence will be on a new foundation & Chinese economy will usher in a relatively strong rebound."

The headwind for our bullish late-2023 outlook will be, once again, inflation… After a notable recession-induced hiatus (ultimately a head-fake) it’ll come back to the fore quickly as we emerge from recession, although not to the degree a global pandemic coupled with an aggressive policy response would induce. 

Over time we’ll learn to live with mid-to-high single-digit inflation… The Fed will as well, as it ultimately shifts its target to something above 2%... Some respected macro analysts see zero chance that the Fed will ever raise their target, as, they say, it will destroy their credibility… I simply disagree.


  1. Thanks for these Sunday's updates Marty! I always appreciate your diligence in managing the market outlook.

    I was sitting at Church this morning and thought of many things. Nonetheless, it was peaceful listening to the music and listening to the Pastor talking about Joseph. Joseph was not mentioned too much in the Bible and might have forgotten by many people. However, Joseph played a significant role at the time in order for Virgin Mary to give birth to Jesus. Without Joseph, history would have been very different.

    In the same token, I would not use the word "wrong" in 2020. Since the market changed so rapidly, anything could happen. We never had a lock down like 2020 and we never saw the government simply printed money and handed it out without much accountability. In my opinion, PWA clients (speaking for myself) are fortunate and grateful that you help us navigate through the uncertainty in 2020. My buddy always told me that be happy that you don't wake up one morning and lose 50% of your portfolio. We must think LONG TERM (I absolutely agree with his comments).

    Like I have been saying that I don't think inflation is under control yet. The Market has put on a deaf ear muff and only selectively listened to Powell of what they want to hear. I am actually quite bearish about 2023 (maybe first half) because of corporate earning suffering and credit dynamic issue. Both of the issues will show up in Q1 2023.

    Keep up the great work Marty! Thanks for everything!

    1. Thanks Sam! I always appreciate your feedback!

      With regard to 2020, yes, being hedged during the collapse was fortunate; we didn't experience remotely the drawdown others, unfortunately did, and the year turned out okay... Just, of course, not quite what it would've been had we shifted more aggressively off of that March low... But, as you suggest, the risk/reward setup, as we saw it at the time, didn't call for it...

      Of course, as always, every bear market offers up lessons, and, in this case, an entirely new paradigm... The covid experience essentially cemented the fact that policymakers will breach all convention, and even the rules (Fed breached the Federal Reserve Act when it ventured into corporate debt), when they deem necessary... A precedent that we must now factor into our theses going forward.

      Take care my friend. You're a pleasure to work with!