Quote:
Originally Posted by jyl
I do spend a lot of time worrying about what was the consensus view but has now become a contrarian view: inflation recedes quickly, the US economy has a "soft landing", Fed stops raising sooner or starts cutting rates. This would be good for 99% of Americans, of course, but I'm not positioned for it.
I don't spend much time worrying about what Aurel describes.
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Following up on the contrarian view I described above, I think that scenario would go something like this:
1. In early 2023, the shelter component of CPI rapidly declines to zero-ish (as 2022’s declines in house prices and rents feeds through to CPI), goods CPI remains benign, and the remaining services components of CPI ease (not completely clear how this happens, unless employment and wage growth weaken meaningfully, but whatever), thus total CPI eases to around the Fed’s target, on a monthly annualized basis anyway.
2. The Fed thus stops its tightening before significant further damage is done to the economy (another 100 bp or so).
3. There is thus no recession, just a mid-cycle slowdown akin to 2015-16. 2023 becomes one of the yield curve’s false alarms (there have been some for the 2Y/10Y, and even for the FF/10Y there may be a first time for everything - the events of the past couple years have been unprecedented in many other ways).
4. SP500 EPS for 2023 settles around $220-ish (i.e. flattish to 2022) and SP500 EPS for 2024 looks like $240-ish (i.e. growth resumes at 8-10%).
5. SP500 NTM P/E rises to 18X-ish (i.e. about where it got to in 2017, coming out of the 2015-16 slowdown.
6. SP500 price heads to 18X $240 = $4300-ish (i.e. about +9% upside from here).
This does not require EPS growth in 2023 or Fed to start lowering rates.
How plausible is this scenario? Something I’m thinking about a lot. I’ll be kind of pissed if it happens, as my positioning will be wrong, but I suppose that is a Grinchy reaction to possibly sparing the country a recession.
Edit: Since this scenario uses NTM (next twelve months) P/E, the hypothetical 18X would be applied at the end of 2023, on hypothetical 2024 EPS.