Source: Bloomberg, Inc.
- Inflation peaks in 4th quarter, fed interest rate policy higher for longer, recession probabilities increasing
- US stock and bond markets both post negative returns in 2022
- Energy and Utilities only positive equity sectors for the year
- Equity Indexes rebound off lows in the 3rd quarter, still post worst returns since 2008
- Currently at 4.5%, fixed income markets now see a 5.0% fed funds rate by year-end 2023
- The Consumer Price Index posts 7.1% inflation in November with gasoline sales leading inflation higher
- Labor market remains hot despite tightening cycle
The S&P 500 is now trading at 17.3X forward earnings vs. the ten-year average of 17.1X. Bloomberg recession probability models are now showing a 100% 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 fourth quarter earnings season and managements outlook on 2023 earnings before getting more constructive on the equity markets.
Fixed Income Strategy
As of January 4, the 10-year treasury is yielding 3.73%. 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 5.10% 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 now at 4.68%. These levels offer an alternative to the risk of recession and falling earnings growth that may effect equity prices in the future.