Ignore emojis in headlines long enough to ask yourself this question: How can the rest of 2022 be??
I did that exercise last week in response to a client inquiry about the second half of the year. The context was extra cash looking for a good long term home (not a business). The question was not so where Capitalize, rather when to deploy it. They understood the benefits of a lump sum investment and the emotional benefits of legging over time; For this portion of capital, they were looking for an aggressive, well-timed entry point.
Some caveats: RWM does not handle billions of client dollars like this; You don’t want to invest “real” money based on my or anyone else’s gut about when to jump into the deep end of the pool. This only works for someone whose financial plan is fully funded, the rest of their home is in good shape, and they’re playing with a discretionary amount of cash.
Regardless, it’s an interesting question.
Answering this requires some imagination about the possible paths to market from here. It requires some self-awareness (and some chutzpah) that you think you know most markets haven’t figured out yet. Throw in some second-level thinking from Howard Marks and you can piece together an answer with a half-decent chance of success.
Let’s start with how we got here:
A massive global pandemic shuts down the world’s economy. A huge government response — most notably a $5 trillion fiscal stimulus from the United States — supercharged the economy while avoiding a catastrophic depression. This has been worsened by a) shift from services to products; b) supply chain disruption; c) The vaccine dilemma. D) Federal Reserve stays at zero for too long.
Worse was the failure to normalize rates within a reasonable time after the epidemic recovery began. With the benefit of 20-20 hindsight, it will likely moderate the worst of inflation.
But all this stimulus had an effect: markets gained more than 20% as 2020 recovered from a 34% selloff; 2021 was even better, with the market up 28% and not falling more than 5% from all-time highs all year.
Then came 2022, the great year of this young decade. Some of this was surely a return of money, but it was a lot: inflation reached a 40-year high; The Fed began raising rates aggressively, and consumer sentiment hit new lows as recession fears rose.
The market sold off about 20% in the first quarter and recovered to about 5%; The 2nd quarter saw a 17% drop. There was no place to hide as bonds fell by double digits in the first quarter (they recovered slightly in Q2). It was the worst start to a year for Treasuries in modern times. Crypto was destroyed by 67%; Stock is punished from work at home; Even FAANMG stock has dropped dramatically. For traders, energy (crude, nat gas, gasoline) was one of the few bright spots with the commodity basket in the first half of the year.
The decline in equity markets is interesting because earnings reported in the most recent quarter were at record highs1. This drove the drop in the first half of the year not due to a decline in earnings but rather a contraction in PE multiples. So far it appears that companies have been able to pass on inflation-driven input costs to consumers.
That leaves us today: markets are in a mild recession and peak inflation appears to be behind us. I’m not sure the market has priced in the Fed’s additional tightening, and I’m particularly concerned about earnings softening a bit this quarter (Q2 reporting started last week) and not at all rosy about how Q3 earnings will look.
On the positive side, households have cash, corporate America’s balance sheets are great, commodity prices have fallen hard, and consumers continue to spend. The negatives are sticky service inflation, especially rents, rising credit usage, low but rising crime.
The big wildcard: Will a backward-curving Fed overreact to inflation already falling? How much impact will the new rate regime have on Q3 earnings? Will the consensus soft landing — a silky, sexy light recession — turn into something worse? Finally, stock prices reflected weak Q3 earnings.
I suspect the FOMC has sealed the deal for quite a hike on July 27-28 at 75 bps.
Your entry point will be determined by sentiment and how the markets are trading at that moment. If you miss last week As for your timing, then I’d look for a big miss this quarter reporting season, or more likely, in Q3 when we find out whether the Fed’s overreaction has done too much damage.
in the past:
The Capitulation Playbook (May 19, 2022)
Panic Selling Quantified (March 24, 2022)
If you sell now, when will you get back? (March 23, 2022)
Don’t panic! (with apologies to Douglas Adams) (March 9, 2020)
1. BAML noted this morning: “Weakest start to 1Q20, below 1-week average beat, 35 S&P 500 companies (including early reporters) reported 10% index returns. 2Q EPS fell 30bp from July to $55.18 (vs our $55.35). Only 43% of companies beat in sales and EPS, the historical post Week 1 average of 47% and the weakest since 1Q20. We expect 2Q EPS to ‘meet’ at best the shock of downward revisions”