Source: Bloomberg, Inc.
- Stubborn Inflation, fed interest rate policy, recession probabilities increasing
- US stock and bond markets both post negative returns in 2022
- Energy only positive equity sector for the year
- Equity Indexes all post losses greater than 20% for the year
- Currently at 3.25%, fixed income markets now see a 4.25%-4.50% fed funds rate by year-end 2022
- The Consumer Price Index posts 8.7% inflation in August with gasoline sales leading inflation higher
- Fed policy pivots from slowing economic growth to creating economic pain to fight inflation
The S&P 500 is now trading at 15.4X forward earnings vs. the ten-year average of 17.1X. Bloomberg recession probability models are now showing a 50% chance of recession in the next 12 months. The average historical S&P 500 trough earnings multiple off of peak earnings has been 14.5X. This implies further downside in the equity markets in the low single digit range if multiples reach historical bear market levels. With recession probabilities increasing, we advise waiting on the third quarter earnings season and managements outlook on future earnings before getting more constructive on the equity markets.
Fixed Income Strategy
As of October 4, the 10-year treasury is yielding 3.61%. The last time the 10-year treasury was at current levels was in 2009; right after the great recession and the low interest rate regime began. Current Fed median dots plots expect a terminal fed funds rate of 4.65% at year-end 2023, with fed funds remaining above 4% well into 2024. TINA “There is no alternative to stocks” ends with the Moody’s Seasoned Aaa Corporate Bond yield at 4.91%. These levels offer an alternative to the risk of recession and falling earnings growth that may effect equity prices in the future.