What three year period from history does the AI-era (2023-2025) most closely resemble? 1994-1997.
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A composite of the average Fed Cycle would cause the following ordering/timing of events:
-March = First cut (8 month pause),
-June = Recession starts,
-October = Market bottom,
-Feb 2025 = Earnings bottom
This is NOT a prediction - only a tool to understand what is "normal"
Were the October lows "THE lows" for the S&P 500? We doubt it.
Three reasons we believe the ultimate lows are still ahead of us:
1) Typically, forward earnings stabilize and turn higher 3-6 months after a market bottom.
Not happening this cycle.
Based off of a historic composite, here is how the major events of 2023 would unfold:
-Fed stops hiking now and pauses for 7 months (Summer 23).
-Recession begins around Nov 23.
-S&P makes an ultimate low early 24.
-Earnings bottom in spring 24.
-Recession ends late-summer 24.
General rules to remember:
1: Equities bottom AFTER a recession has begun...generally ~3-6 months.
2: Equities bottom after Fed is done hiking (87 = exception).
3: Earnings contract around the start of a recession.
4: Multiples compress heading into recessions.
New report out to 3FR clients:
-Absent forward recession, 10% S&P 500 corrections are buying opportunities.
-We analyze credits spreads, which are historically benign (i.e. showing no recession risk).
-Neg wealth shock is a risk.
-April should provide a better re-entry point.
Since 1950, there have been 48 bear market rallies.
Only six have exceeded 13% and only five have exceeded the current rally.
If this does, in fact, turn out to be a bear market rally, it will be one of the largest ever.
Stocks continue to ignore the bond market.
The S&P 500 is near 4,000 while Inv Grade credit spreads have blown out (2 basis points below Oct highs).
Historically, this combo - IG Spread UP + stocks UP - is a horrible backdrop for forward equity performance.
New report out to 3FR clients:
-The growth scare we predicted is here.
-Recession remains unlikely.
-Equity weakness still has further to run (likely to run into correction territory).
-Stay patient into mid-April.
Despite a 9% S&P 500 correction, we have yet to see excessive pessimism reflected by ETF positioning.
Inverse ETF volume is currently at 42% of total speculative ETF volume.
Major bottoms form around 60%...
The 2-10 yld curve has steepened by 35 bps since July
Most of the steepening has been due to the 10-year rising (bear steepener)
Bear steepeners are rare and usually occur at two distinct points of the cycle:
1) Heading into recession (inverted YC)
2) New expansion (pos YC)
For months, the S&P 500 has traded within +/- 10% of fair value.
At 4,100, the market is now back to being +10% overvalued based on forward earnings + interest rates.
Buying at 4,100 embedded assumptions, either:
-Lower rates,
-Earnings growth, or
-Multiple expansion vs history
New report out to 3Fourteen clients updating our housing recession model.
For the first time since 2020, both multi-family and single-family housing units under construction are falling simultaneously.
W/o an uptick in housing activity, construction job losses are coming.
One year ago, the there was ~$1 trillion in the Treasury's account (TGA).
Over the past year, Yellen has spent down the TGA adding ~$800 billion of liquidity to financial markets - offsetting the Fed's Quantitative Tightening program.
Chart shows last 12 mo chng in TGA vs SOMA