Stocks not yet priced for recession…

**The Market Still Isn’t Priced for a Proper Recession**
**Markets are doing what they always do, hoping against hope that there’s no recession, or at least a very mild one, right up to the last minute**
**By James Mackintosh, The Wall Street Journal, Sept. 22, 2022**

**The stock market is almost always late to wake up to the threat of recession, but it’s increasingly hard to miss the warnings from the Federal Reserve. Not only might there be a recession, but the Fed has no intention of stepping in to save investors this time.**

**The problem is one I’ve been banging on about all year: Investors still aren’t factoring in much threat to earnings, even though recessions almost always hit earnings hard. Instead, most of the fall in stock prices has been due to rising rates lowering valuations...Wall Street continues to predict decent profit growth next year.... Investors still hope for a fairly soft landing....**

**The strong link between forward price-to-earnings ratios and real rates, as captured by the yield on 10-year Treasury inflation-protected securities, shows that still most of the decline in stocks this year wasn’t about the threat to earnings, merely the mechanical effect of the Fed...**

Bottom line: look out below. Just as the 2021 market was priced for perfection, traders haven’t abandoned their optimisim. Stock prices are only reflecting the Fed’s interest rate raises, not lowered profits if the landing is harder than hoped.



And not the ramification that the recession will be worse in Europe (accelerated by the Russia/Ukraine conflict) than in the US.

We may not have a world war, but it may feel like we are having one.


As the IRR across different companies shrinks there will be a contraction in earnings. Looking at the 1948 data we are talking later 2H23.

The bottom in the markets will be lower in early 2023 but there will be no recovery in the markets that is lasting in 2023. This is going to grind out.

If you want growth in the GDP look to fiscal policy or you get nothing.

In a typical recession, how much should we expect earnings to fall? 20%?

If you take a typical PE of 16 for the S&P 500, and reduce that by 20%, you would buy when PE falls to 13.6.

Or is there a better way to do this?

I think you would be very cautious about high PE stocks. But those with reasonable growth rates might allow somewhat higher PE’s. Maybe 30 to 24 for example.

And then add a panic factor for those who rush to exit at the last minute.

That is what keeps me from selling out right now – when would I get back in? It seems OBVIOUS to just sell and wait right now. Or at least, sell QQQ and tech type stuff. Maybe sit out in large cap value. But when do you go back in?

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Out of funds earmarked for stocks…

37% of it I’m holding in cash/treasuries/CD with hopes of a buying spree if and when the stock market dips even more, OR maybe a few rehab home purchases again - if prices dip more.

Thus far I’ve been feeling a bit clever having safe-harbored 37%.

Now, well, I wish I’d done much more.

with hopes of a buying spree if and when the stock market dips even more,

How will you know that there won’t be further “market dips even more” events?

BTW, ‘hope’ is not an investing strategy, it a going to heaven strategy. The rub is that you have to die first.

The Captain

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I don’t know the future.

But, I do know that the 37% I put to the side- has not participated in the unraveling of smoke and mirrors “stock gains” of yesterday. It’s been sitting , earning a humble interest rate - and not plummeting with everything else.

One thing I do know: If I buy today, it’s a heckuva a lot cheaper than I would’ve paid yesterday or last year when I kicked off early retirement.

Hoping to buy assets cheaper - I think that’s a rather sound thing.

No different than waiting to buy a home, or a car, or a butter - when its on sale. If it never comes on sale - and skyrockets back up - oh well - I’ll enjoy that rise in the other 63% -and miss out on it on the 37%.

All I know is stuff is cheaper to buy today than it was yesterday, last week, last year.

But if anyone wants to buy assets from me - say homes at TODAY’s value with NO regard to what will happen once further rate hikes kick in - - please, let’s talk off line. You got a deal.