Posts Tagged "Kevin Caron CFA"
The International Monetary Fund delivered a sobering assessment of growth in their latest outlook. High inflation, war in Ukraine, and lingering supply issues are culprits. While credit spreads and earnings forecasts appear reasonably steady, our own assessment of data points to slowdown. As we look for signs of a turn, the weight of evidence points to some continued caution for now.
Central Bank all in to fight inflation Markets signal inflation to fade Rates to push higher still Policymaker credibility key to fight Valuations more attractive. We remain cautious based on incoming data and enter the final quarter underweight risk assets.However, policy priorities seem to be having some positive effect on expected inflation, despiteupsetting financial markets. This is a difficult and complex environment, and we continue to followour tactical discipline in navigating a very unusual year. While we are not out of the woods yet,valuations are becoming better as are longer-run expectations for returns.
We critique existing “style” investing frameworks as popularized in various “value” and “growth” indices. We cite three critical problems with how the indices are constructed, and discuss risks that come with overly strict adherence thereupon. Lastly, we offer an alternative framework as a potentially better way to think about investments.
The economy is either in recession or booming. This is what the headlines are telling us each week. So, against this muddled stream of seemingly conflicting and contradictory information, we look for signs regarding which way we are headed. Consider the following evidence for the “recession” case and the “boom” case.
While we usually comment on financial assets like stocks and bonds, real estate also plays an important role in the broader economy and financial markets. With signs of possible cooling now emerging in property markets, we consider what a slowdown in real estate could mean for the U.S. economy and financial markets at large.
In 2018-2019, real estate company Zillow showed “for sale” inventory of U.S. homes between 1.2 and 1.4 million units. After the pandemic in 2020, that “for sale” inventory began a sharp decline to 440 thousand units in March 2022. In other words, in March, the supply of homes was about 1 million units short of, or 60-70% below, pre-pandemic levels based on Zillow’s data. At the same time supply was falling, demand was surging. Existing home sales surged by 1 million units above normal in 2020-2021, and new mortgages for purchases surged 40%. Remote work trends, federal stimulus, and record-low,…
Set against a backdrop of rising inflation and interest rates, calls for a “technical recession” are growing. Our check of the data leads us to maintain our near-term, tactical “underweight” to stocks. However, the correction in stock prices contains a silver lining as valuations have become better, boosting long-run return expectations.
Apart from a short downturn early in the pandemic, the stock market has enjoyed a great bull run since 2010. Yet, from January 3 through May 20, the stock market fell about 18.5% before rallying 5% off the recent bottom. Despite the recent rally keeping the market out of “bear market” territory, we should not let down our guard because growth is still slowing. A lapse into outright recession would complicate the bull case for stocks through year-end.
On the surface, valuations appear to be coming back down to earth. The Standard & Poor’s 500 stock index has declined to nearly 4,000 from almost 4,800 in January. Back at the January peak, forecast year-ahead earnings for the index stood at $223, and now those forecasts are at $237. Today’s price-earnings ratio is 17x compared with 21x in January and in line with the 10-year average. So, stocks are moving down despite rising profit forecasts, resulting in better value.
A sharp rise in interest rates catches the bond market by surprise and creates a challenge for the bull case for stocks. This week, we look at how rising rates are shaping the outlook.
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