Broker Check

The Manley Macro Memo

March 10, 2023

Stocks have a poor risk-reward and offer a historically low equity risk premium. A 4.9% risk-free rate is great.


  • In January, stocks rallied because many investors believed that inflation was defeated and the Fed was poised to reduce interest rates later in the year. Unfortunately, strong February economic data and a reacceleration in the inflation rate indicated that the Fed needed to raise interest rates higher and for longer to combat inflation. Like 2022, nearly all asset classes declined in February as interest rates rose sharply.

  • While many investors thought the January rally indicated an improvement in the economic outlook, we believed it was a bear market rally. In our view, the rally was driven by favorable seasonality and market flows (corporate buybacks, retirement contributions, speculative positioning, and rebalancing) – not an improvement in the economic outlook.

  • There is tremendous economic uncertainty. Inflation surged to a 40-year high, and the Fed has aggressively raised interest rates to weaken economic demand and reduce inflation. Unfortunately, the Fed has an almost perfect record – nearly all its tightening cycles lead to recession and an adverse credit event. We believe that a recession is likely this year because the Fed is ignoring the leading indicators of the economy and tightening into an economic slowdown.

  • Market history shows that the Fed typically raises interest rates until something breaks. This week the Regional Bank Index plunged more than 15% as invested feared that small and mid-sized banks might face a liquidity crisis. Investors became concerned that problems at Silvergate Capital and Silicon Valley Bank (banks that respectively deal with crypto and venture capital customers) may spread to other regional banks. These credit issues are the unintended consequence of the Fed's tightening cycle.

  • Stocks offer a very poor risk-reward since valuations are at historical highs and corporate profits are in a recession. Sharply higher interest rates drove stocks down last year, and we believe stocks are poised for another decline as the economy slows, and profits disappoint. Bear markets usually trough with the S&P 500 selling less than 14 times peak earnings. Since earnings peaked last March at $210, the S&P 500 could fall to 3000 -- an additional 20% decline.

  • In this high-risk environment – economic uncertainty, risk of the Ukraine war escalating, and tension with China – we believe a nearly 5% risk-free rate is very attractive. We have a significant investment in a 2-year U.S. Treasury ladder, yielding around 5% and giving us a solid return until the headwinds are reduced, and stocks and bonds offer better risk-reward.