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)

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.