What are the components of the Fed’s gauge?
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Looks like this is a prediction based solely on the 3mth - 10yr Treasury spread, so based on inverted yield curve. It doesn’t include any other factor that might indicate recession, such as employment measures, as one example.
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I think the FED is trying to prevent inflation from rising by slowing down employment. The inflation trend has been decreasing steadily, but it has historically had blips up along the way. The FED might worry that high employment will drive up the wages and services. The FED 5-year breakeven, which measures the expected inflation, has increased slightly potentially because of strong employment, higher service prices, and oil. The FED may not cut rates until the expectation reaches 1.6 or 1.7.
My opinion is that the FED will raise the rate today and signal that it will keep it high for a while. The CPI numbers alone might suggest that the rate hike is unnecessary, but the FED considers other indicators.
This does not necessarily imply a recession, but it is a potential danger that we should monitor.
The yield curve has inverted six times since 1978, and each time it was followed by a recession within 12 to 22 months. How deep it inverts does matter and we are pretty deeply inverted at this point. The recession usually starts when the yield curve steepens again, as the FED cuts rates to stimulate the economy or fix something that broke.
Inversion does not cause a recession as it’s just one indicator of a pessimistic outlook
Would love to hear some counter arguments why the inversion is happening besides it being a negative outlook.
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META with a beat a raise and a rosy outlook. AH…BOOM!!!
The bear market of 2022 was brutal. It was incredibly brave of anyone to stick with stocks when seemingly every day you watched your financial future disintegrate. In a word it was hard.
We are now in a period when you need to enjoy this. Need to accept and appreciate it as a payoff for staying the course, for not wavering. I’m very much enjoying the payoff of staying the course. A pat on the back for all of us that stuck with it. We deserve it. Enjoy.
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The below is not my work, but that of Brad Freeman’s (aka, Stock Market Nerd) free newsletter. I’m sure some folks like him and his analysis, some may not, I think he does a good job, but he recently wrote about the inverted yield curve and the relationship with the Fed’s current QT policy. I don’t know enough to claim to say who is correct, just posting this for information since CoopersHawk asked for counter arguments. Enjoy.
“We constantly see bears point to the deep 2-year to 10-year yield curve inversion as a reason to be pessimistic. This ignores the historic pace of quantitative tightening currently happening. If the Fed liberally sells off its portfolio of short-term assets, rates on those assets will rise faster vs. assets that it’s selling less of – all else equal. Furthermore, QT sucks money out of the economy which is intentionally supposed to diminish longer term inflation expectations which can also lead to 10 year yield compression. So? Of course the yield curve is inverted. What did you expect? When QT ends is when the immense pressure on this inversion will fade. It’s artificial and manufactured by balance sheet reduction. We view the yield curve as a less reliable recession indicator today than it has even been.”
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I appreciate your relevant reply, foodles. It’s good to have my assumptions challenged and have a fruitful discussion.
I’ve been following Brad’s publications since early last year and I’m impressed by his detailed analysis of individual stocks. I also like that he shares his portfolio and his trades with his rationale through savvy trader alerts.
I subscribed to his newsletter on April 1st 2022 and this is how he explained his stock picking approach: “I invest based on my personal situation, which influences my risk tolerance and investment horizon. I’m in my early 20s and I don’t have dependents, so I can afford to take calculated and diversified risks.”
If you have a high-paying tech job and you can invest regularly in a portfolio, that’s great. I did something similar earlier in my career but with ETFs.
He has a 50% YTD return but he also had a big drawdown at the end of last year, so he’s only slightly ahead of the S&P 500 over the last year.
He mentions the inversion of the 2-year and 10-year yields, but the best indicator is the 3-month and 10-year yields. Either way, both are deeply inverted.
QT is a relatively new phenomenon and started on May 4th 2022 according to a FED announcement. So maybe this time is different and the inversion is caused by QT. But that doesn’t explain the previous five recessions predicted by the inversion.
I did some more research tonight and found this:
[https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci2-7.pdf
It’s old but interesting that it came out a year before an inversion that forecasted a severe recession in 2008.
The bottom line is that we need to watch out for the inversion reversal and see if it’s due to economic slowdown.
The second item is why I joined this board. The macro environment matters. Sometimes more than others, so be aware of those risks.
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I also claim no expertise, although I do have first hand experience, having lived through stagflation and 14% yield on 10-year treasuries in the early 80’s. My observation is that the inverted yield curve is not because of falling yields (because they have been rising this year) on the 10-year, but rather the larger increase on the short term due to the fed’s rapid raising of the rate it controls.
As far as stock value… Well, back to the old 1/x p/e calculation. Current 10-year is 3.85%, p/e on that is 25.9. Put Graham’s 1/3 safety factor and p/e of 17.3 is investable. Look at these industrial stocks:
STOCK P/E DIVIDEND YIELD DOW 13.4 5.24 CAT 19.4 1.98 F 18.8 4.42 LMT 16.6 2.64 DE 15 1.12 GE 14 0.21 H 27 1.96 HAL 14.7 1.67 OC 9.3 1.59 RS 10.5 1.37 RTX 23.1 2.71 SLB 21.2 1.73 WY 20.3 2.21
These are after large gains this year. Just a sample. It is likely that an explanation is that the market is expecting a recession and these are cyclical and market is looking ahead. But is the bad news already baked in? I don’t know. I’m just an old guy sitting on a hll surronded by blue and green who has underperformed just about everyone and everything over the 1, 3, 5, 10 year periods.
Speaking of which, up 33.4% YTD, 32.3% cash. And the guy that took his one-day trading profit in ENVX and missed out on on the 10% post earnings, AH pop.
KC
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Saul board used to say that about SaaS/growth valuations.
Then 2022 hit and by early 2023, Saul pivoted into diff stocks.
Thanks largely to May-July, everyone back on valuation doesnt matter train. Many stocks actual growth is slower now than in 2022, yet stocks were down last year and up this year.
Doesnt seem sustainable, but main challenge is knowing when dam breaks and not IF.
So far my timing in the when is lousy.
Dreamer
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I read from yesterday’s Fed news that Powell mentioned that Fed staff is no longer forecasting a recession, for what that’s worth.
Presumably they are reviewing more signals than yield curve alone. Will be interesting to see how much higher interest rates slow down borrowing and then economic growth associated with that borrowing.
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I listened to the Fed’s call while hiking yesterday and heard them talk about labor and growth. They said they need to lower the growth rate below the trend. But today’s data showed higher GDP and lower unemployment claims than expected. This means the growth rate is still high. The 10-year Treasury yield rose over 4% again on this news. This may explain why the market weakened after the strong open today.
Will the rates stay high for longer? We’ll have to wait for more data, such as the CPI in two weeks. The Fed is not forecasting a recession now, which suggests they think they can keep raising and holding rates for longer. Maybe we’ll see 6% by the end of the year with this strong economy.
This also raises questions about the Fed’s earlier claim that inflation is transitory. They don’t seem to have a great track record of predicting the future in my opinion.
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I like KC’s post looking for stocks under a 17x pe. I think that’s a helpful benchmark to keep in mind. Many smart ppl are predicting the 10y will go up which could cause further downside to this rule of thumb. Furthermore, a lot of the high quality large cap businesses are currently at lower fcf yields then the 10y and especially shorter term yields. Given that Jerome Powell is actively pushing for below trend gdp growth, wouldn’t it make sense to put some money into SGOV, a short term bond ETF? Or something of that nature. A free 5.5% is nothing to scoff at when many equities seem very optimistically priced.
I personally own stuff like Alphabet which has a yield slightly below the 10y but I believe can power through a recession alright and I have a low cost basis. Nonetheless I’m not buying stuff like that here, have been looking into small/midcap value as I’ve read a lot about the extent to which growth has outperformed over the past decade and high pe stocks have outperformed lower pe stocks to an unprecedented extent.
My point in all this is that there is a lot of downside risk to equities, especially large cap and SPY, if rates stay high and our economy slows which seems quite likely.
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I don’t disagree all that much. I would point out that as of a week ago, the NASDAQ 100 p/e was 32.72, S&P 500 index was 20.37, and the Dow Jones Industrial at 25.85. Not cheap, but compared to 25.9 these are not high enough to send shivers down me spine. I suppose the S&P 500 is based on cap wieghted index, so would include a number of mega’s with no earnings.
Thursday was big reversal day. I think the candlestick technical crowd is taking notice. I think the revesal as big for the indexes. The movement of ENVX was epic.
Added note: I see the futures are up premarket. Up 0.7 or 0.8%, not huge, but will be interesting to see if there is any downward follow through or if yesterday was a head fake.
KC
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The PCE came in tame. Inflation falling, consumers spending. This is the supposed key indicator that Powell and the Fed watch. Really couldn’t have come in any better. Strong and unsurprising reaction by the markets.
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ROKU up 25% on 11% y/y growth and negative ebitda.
This is part of that game of “we beat estimates!” after the estimates were dropped to the floor.
Seems like a totally healthy and fundamentals-based bull market to me.
-Dreamer
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The problem with this kind of thinking is this. It’s like a team wins the Super Bowl and a commentator focuses only on the extra point their kicker missed in the 3rd quarter.
Focusing on a move today by ROKU as proof that the entire stock market is way overvalued and going to crash is short sighted. We can find examples daily to bolster our bias. The move today in ROKU is meaningless to my portfolio. Happy for anyone that owns ROKU though.
Edit. I just briefly looked at ROKUs numbers and recent price activity. So the market cap at just under 12 billion, doing 3 billion plus a year in revenues. Maybe they have a path in front of them that’s starting to look better then it’s recent past. I see that in April 2021 they hit an ATH of 476ish. So just maybe when they got down into the 40 buck range, they were incredibly oversold, maybe thst price was a gift, and maybe the price now is just getting back some of what it lost the last two years. So 85 bucks now, when it was 476 two years ago? Not that surprising to see a double from its bottom. Will be interesting to see if the price can double again in the next few years.
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Saw an interesting stat that I hadn’t read before. From a Beth Kindig post, the Nasdaq was up more in the first 6 months of this year (around 30%) than in any year since it’s inception in 1971 (over 50 years!).
It makes total sense in hindsight, a year ago the economy was still dealing with the end stages of Covid, supply chain issues, 9% inflation, the Fed raising interest at historic rates with no end in sight, potentially deep recession around the corner (most opinions were best case scenario was a soft landing which most thought wouldn’t be possible) war in Ukraine, huge stock valuation compressions (especially in high growth equities), etc. There was just never any good news for all of 2022. And the market followed along with the script and bottomed (at least so far) toward the end of last year.
Compare to today where Covid is a distant memory, supply chain issues are mostly gone, inflation down to 3% and falling fast, Fed either done or nearly done raising rates (and most reasonable people see them lowering rates in 2024), the Fed isn’t even expecting a recession now (not that I give them much credence, but most people seem to think a soft landing is now the base case), Ukraine war still going but people get tired of hearing about it so it’s impact wains (not saying that’s a good thing, but we’re used to it now), and after most high growth valuations got cut 50-75% or more in 2022, starting in 2023 and especially the last few months, they’re rebounding with the AI catalyst, as the market does, potentially too far, too fast.
Where we go next is anyone’s guess, but things sure seem a heck of a lot more positive this year at this time than a year ago. And remember, the market is forward looking 6-9 months, so to me, it’s starting to price in the end of rate increases and even possible rate cuts is why it continues to rise.
And regarding the commentary about ROKU, I agree, it’s all a game, but after the last few quarters of companies lowering their estimates (so that they can beat them), I think that is going to be the status quo and we’re going to see a lot of companies clearing very low bars, and being rewarded for it. Especially if they can increase forward guidance at the same time.
Just my opinion, it was worth a negative 60%+ in 2022, but is up almost 60% in 2023. And yes, I know how percentages work, and that doesn’t make me even to the start of 2022 yet, but I’m getting there.
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What you say here is fascinating to me. That the narrative out there in mainstream market media is looking positive.
This is so heavily correlated with the ongoing FOMO-forced buying by so many people with lackluster gains, who incorrectly expected deeper drops this year so far in 2023.
Just interesting to note…market psychology is so difficult for even the best of the best.
As much as everyone keeps saying “buy when there’s blood on the streets” or “be greedy when everyone is fearful”, in reality, I would wager 95% of the best investors out there just can’t do it in reality.
The following is the trend of cash allocations of a couple Saul board members whom I all respect very much:
April 2022: -7.3% cash (margin use)
May 2022: -3.7% cash (margin use)
July 2022: 34.1% cash
Oct 2022: 30.9% cash
Dec 2022: 34.1% cash
Jan 2023: 30% cash
Feb 2023: 35.7% cash
Mar 2023: 30.3% cash
Apr 2023: 21% cash
May 2023: 21.4% cash
Jun 2023: 19.7% cash
July 2023: 12.7% cash
Apr 2022: 18.1%
May 2022: 25.8%
Jun 2022: 21.7%
July 2022: 27.7%
Aug 2022: 38.4%
Sep 2022: 25.6%
Oct 2022: 20.2%
Nov 2022: 13.1%
Dec 2022: 30%
Jan 2023: 33.3%
Feb 2023: 46.5%
Mar 2023: 42.6%
Apr 2023: 23.7%
May 2023: 48.4%
Jun 2023: 36.1%
July 2023: 42.1%
Apr 2022: 4.5%
May 2022: 16.9%
Jun 2022: 22.4%
July 2022: 20.5%
Aug 2022: 25.5%
Sep 2022: 18.8%
Oct 2022: 17%
Nov 2022: 17.2%
Dec 2022: 23.3%
Jan 2023: 18.2
Feb 2023: 26.9%
Mar 2023: 28.1%
Apr 2023: 32.3%
May 2023: 23.1%
Jun 2023: 18.8%
What do we observe?
During the beginnings of the market crash in 2022, margin and leverage was still employed in one case.
Then, cash was raised, and maintained at high levels, typically through the market bottom. Significant rallies are missed in one case…with extreme levels of cash even as of late.
Multiple, repeated near-market-bottoms were mostly “missed” - no significant buying occurred for some in October, December, January, March etc.
Classic examples of sell toward the lows, then start buying at the ‘highs’ (or if refusing to buy, then face being ‘locked out’ of the rally).
I also want to point out, that the NYFANG index (the megacap index: NYSE FANG+ Index | ICE which compose only of META, AAPL, AMZN, NFLX, MSFT, GOOGL, TSLA, NVDA, SNOW, AMD) is up a staggering +80% YTD!!!
(NYFANG is +80% YTD, and was down -40% in 2022…this in comparison to the above three board folks who are up +20 to 40% YTD, but that is after being down -64.7%, -49%, -71.4% in 2022)
Yes, a simple concentrated portfolio of the largest, hundreds of billions, and trillion dollar market cap companies has utterly trounced the returns of the best analytical minds around these parts…
Even another simple comparison (without dividends counted as well)…the QQQ index, is up +44% YTD while it was down ‘only’ -33% in 2022…
It turns out, beating the market, without a Fed driven easy money policy, seems quite difficult to do
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Well said…
unfortunately many on Saul’s board, including Saul, have not yet understood or acknowledged this reality. 2020 and 2021 behavior has crept back into their investing methods.
They continue to:
- Focus on quarter to quarter comparisons without stepping back and paying attention to trends (backward and forward).
- Hyper focused on growth and recently, free cash flow (which is often misleading in the light of SBC).
- Buy at the highs and sell at the lows e.g. ENPH this week…why? because growth is lower than expected. I would contend that if growth is all they care about then they made a mistake buying ENPH in the first place.
- Ignoring macro because apparently “they cannot control it”
Herd mentality alert…by the end of Aug, everyone and their brother on that board will own AXON and PSTG. Why? because Saul bought it.
insert face palm emoji here…
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I think beating the market using your own brain power is very hard. Too hard for me. If you rely on the brain power of others, it is not as hard. There are newsletters that have beaten the market by a point or 2 every year for decades, ETFs like MOAT, or spgp, that have beaten the s and p for 10 years, you can buy the asset classes that are the cheapest, yet have good earnings growth rates, and good dividends like latin american funds right now, you can also buy spy and sell calls on it. But for sure, really slaughering the market is way above my pay grade.
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“ZoomInfo shares are falling sharply in late trading Monday, after the provider of database information for corporate sales and marketing teams reduced its full-year financial guidance. “
35,000 clients.
Their clients, who presumably want/need database info for their sales and marketing teams to work on for net new growth prospects, are expected to spend less than previously projected.
Mull that over a few times.
Seem bullish?
Dreamer
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