This has been the pause rally. Never mind that there was no rate pause - it's imaginary. Like everything else in Disney World.
An unnamed bull claimed recently that more money was lost trying to avoid bear markets than from the bear market itself. Tell that to those who hung on after 1929. It took 25 years to get back to breakeven. Not everyone has that kind of time.
Bulls continually make the most optimistic assumptions to arrive at their fairy tale conclusions. Wall Street is currently predicting a -4% earnings recession in 2023.
Below we see that in 11 out of 11 recessions since 1950, corporate profits as a share of GDP fell back below 6%. The pandemic was the twelfth recession, the shortest recession in history, and the only time profits grew during the recession. Bulls are now betting it will happen twice in a row.
If they are wrong, they have -40% downside. Minimum.
Corporate profit / GDP (blue horizontal line is 6%):
We are in a demographic super bubble. The pandemic arrived at the worst time possible for Boomer retirement. Twenty million mass layoffs in March 2020 - aka. a decade worth of jobs - forced two million Boomers to retire early. Subsequently, the economy has been beset with inflation especially in the low paying service sector. The Fed has made almost ZERO progress in bringing down service-side inflation. Which means they will continue raising rates until something else breaks.
Fed policy throughout this debacle has been highly regressive. Which means that it has been good for the wealthy and very bad for everyone else. They have kept their balance sheet at double the pre-pandemic level while raising rates TRIPLE the pre-pandemic level. The middle class is about to implode, but the wealthy are totally clueless. In 2023, both fiscal and monetary policy will be highly restrictive. Fiscal policy will be constrained by the impending debt ceiling crisis which hits no later than July.
Which gets us back to the casino.
The pause rally is now six months old. During this time, markets have fully discounted a rate pause. What they haven't discounted is a recession.
If the Fed eases it will because of recession. As we see below, when rates came down, stocks imploded.
Many bulls are saying that October was the low because sentiment reached an extreme. However, what they are ignoring is the fact that stocks remained historically overvalued relative to Treasury bonds.
Below is the equity risk premium which measures the S&P yield relative to the 10 year bond yield. In 2008 and 2020, the ERP soared. In October 2022 the ERP hit a cycle low.
Entering earnings season, bulls are counting on RECORD corporate stock buybacks to paper over the incipient collapse in corporate earnings. We are on MAXIMUM smoke and mirrors.
One must ask the obvious question, if corporate buybacks are so high then why are the stocks with the largest buybacks imploding?
In summary, volatility has collapsed back to where it was at the all time high.
Which means, BTFP.
