Bear Market Chatter
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S&P 500
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Bank of America lowers S&P price target, sees stocks dropping another 5%
(14 Jul 2022) Bank of America lowered its 2022 S&P 500 price target from 4,500 to 3,600, a 20% adjustment and a further 5% fall from current levels. Strategist Savita Subramanian wrote that the benchmark index could drop to 3,000 to 3,200, though, by year end. Price target adjustments are a joke. How about on Christmas Eve they make a new one for the year end; then they can proclaim to the world that their price targets were almost precisely hit. For the record, they will be wrong. We made a note to update this when the dust settles on 2022. They will have been wrong, having been swayed by the emotion of the time. UPDATE: 01 Jan 2023 (check back then): |
The economy—and the markets—should be able to withstand the coming tightening cycle
(14 Feb 2022) Want an idea of how the markets might react to a multi-year series of rate hikes? Look no further than 2015 through 2018. In the three-year period between December of 2015 and December of 2018, the Fed initiated a total of nine, 25-basis-point hikes, taking the lower band of the Fed funds rate from 0% to 2.25%. That same scenario seems completely plausible this time around. Common sense test: It is rather difficult to imagine would-be home buyers proclaiming, "A 6% mortgage rate? That's it, we're out!" (6% is probably the max rates would spike to; they peaked at 4.94% during the last tightening cycle.) Just as the last series of hikes didn't chase away buyers, it also didn't run off investors. Sure, we had that ugly fourth-quarter downturn in 2018 which culminated in a negative year, but that was the result of trade tensions, D.C.'s battle with big tech, and a host of other concerning headlines. By April of 2019, the Q4 losses had been erased, and the markets were off to the races once again—at least until a global pandemic entered the field. Yes, piloting a so-called "soft landing" of the economy is going to require some finesse by the Fed, but we don't buy the current narrative that inflation is so out of control that it cannot be subdued. Supply chain issues will abate this year, higher rates will help dampen the unbridled enthusiasm which has pushed up the cost of new and used vehicles and homes, and technology will continue to put downward pressure on prices. Add needed tightening to the mix and we can make a good argument for a decent year ahead, especially after the market's recent pullback. We retain our 5,100 target price for the S&P 500 (which is suddenly sounding a lot better), with the caveat that we are due a negative year—much like the one we had in 2018. Quantitative tightening will probably continue into 2023 and then end at some point in the year. The Fed should be able to whittle its balance sheet down to a more manageable (yet still unacceptable) $7 trillion or so. We do see a recession on the horizon, but that will most likely come to pass in the election year of 2024.
(14 Feb 2022) Want an idea of how the markets might react to a multi-year series of rate hikes? Look no further than 2015 through 2018. In the three-year period between December of 2015 and December of 2018, the Fed initiated a total of nine, 25-basis-point hikes, taking the lower band of the Fed funds rate from 0% to 2.25%. That same scenario seems completely plausible this time around. Common sense test: It is rather difficult to imagine would-be home buyers proclaiming, "A 6% mortgage rate? That's it, we're out!" (6% is probably the max rates would spike to; they peaked at 4.94% during the last tightening cycle.) Just as the last series of hikes didn't chase away buyers, it also didn't run off investors. Sure, we had that ugly fourth-quarter downturn in 2018 which culminated in a negative year, but that was the result of trade tensions, D.C.'s battle with big tech, and a host of other concerning headlines. By April of 2019, the Q4 losses had been erased, and the markets were off to the races once again—at least until a global pandemic entered the field. Yes, piloting a so-called "soft landing" of the economy is going to require some finesse by the Fed, but we don't buy the current narrative that inflation is so out of control that it cannot be subdued. Supply chain issues will abate this year, higher rates will help dampen the unbridled enthusiasm which has pushed up the cost of new and used vehicles and homes, and technology will continue to put downward pressure on prices. Add needed tightening to the mix and we can make a good argument for a decent year ahead, especially after the market's recent pullback. We retain our 5,100 target price for the S&P 500 (which is suddenly sounding a lot better), with the caveat that we are due a negative year—much like the one we had in 2018. Quantitative tightening will probably continue into 2023 and then end at some point in the year. The Fed should be able to whittle its balance sheet down to a more manageable (yet still unacceptable) $7 trillion or so. We do see a recession on the horizon, but that will most likely come to pass in the election year of 2024.
Permabear Jeremy Grantham says stocks are in a superbubble, sees benchmark falling nearly 50%*
(2022.01.25) We are not a fan of permabears—individuals who chronically predict that the stock market sky is falling. We liken them to the man who had engraved on his tombstone, “I told you I was sick.” When major corrections do manifest, they are always there to take credit for “bravely” making the calls while the world fiddled. This leads us to Jeremy Grantham, the British billionaire investor and co-founder of GMO, a Boston-based asset management firm. Grantham has reissued his proclamation, first expressed before last year’s massive market run-up, that we are in the fourth superbubble of the past 100 years—the last three being the Stock Market Crash of 1929, the dot-com bubble of 2000, and the financial meltdown of 2008. Just how much does Grantham predict the markets will fall? For the S&P 500, on which we have a year-end price target of 5,100, he is calling for a level around 2,500. That would represent just shy of a 50% drop from its early January peak. As was the case with the tech bubble burst, he believes the drop could be substantially greater for the NASDAQ. In dollars and cents, Grantham notes, this could equate to the loss of some $35 trillion worth of wealth. While we actually agree with some of the rationale for his doomsday call (irresponsible fiscal and investor behavior, for the most part), we don't agree with his conclusion. Corrections have a way of sobering investor sentiment, and the lack of pullbacks since March of 2020 have led to overconfidence in high-flying equities with little to show in the way of earnings. We are due a normal, natural, garden variety downturn—the kind we used to get quadrennially; but nothing to the extent which Grantham is predicting. America’s $29 trillion national debt and annual budget-busting deficits are another story. In that respect, we do believe the piper will have to be paid one of these days; just not in 2022.
(2022.01.25) We are not a fan of permabears—individuals who chronically predict that the stock market sky is falling. We liken them to the man who had engraved on his tombstone, “I told you I was sick.” When major corrections do manifest, they are always there to take credit for “bravely” making the calls while the world fiddled. This leads us to Jeremy Grantham, the British billionaire investor and co-founder of GMO, a Boston-based asset management firm. Grantham has reissued his proclamation, first expressed before last year’s massive market run-up, that we are in the fourth superbubble of the past 100 years—the last three being the Stock Market Crash of 1929, the dot-com bubble of 2000, and the financial meltdown of 2008. Just how much does Grantham predict the markets will fall? For the S&P 500, on which we have a year-end price target of 5,100, he is calling for a level around 2,500. That would represent just shy of a 50% drop from its early January peak. As was the case with the tech bubble burst, he believes the drop could be substantially greater for the NASDAQ. In dollars and cents, Grantham notes, this could equate to the loss of some $35 trillion worth of wealth. While we actually agree with some of the rationale for his doomsday call (irresponsible fiscal and investor behavior, for the most part), we don't agree with his conclusion. Corrections have a way of sobering investor sentiment, and the lack of pullbacks since March of 2020 have led to overconfidence in high-flying equities with little to show in the way of earnings. We are due a normal, natural, garden variety downturn—the kind we used to get quadrennially; but nothing to the extent which Grantham is predicting. America’s $29 trillion national debt and annual budget-busting deficits are another story. In that respect, we do believe the piper will have to be paid one of these days; just not in 2022.