We analyze the economy and financial markets through the lens of an experienced contrarian value investor. We believe that capital preservation is paramount, and valuation is the best measure of an asset’s long-term expected return.
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The fourth quarter began with the stock market in a correction. By the close of October, the S&P 500 had experienced a 10.6% decline from its peak in July. Although the S&P 500 maintained a year-to-date increase of over 10%, the S&P 500 equal-weight and the small-cap Russell 2000 were down by 2.5% and 4.6%, respectively. The primary catalyst for this stock market weakness was the sharp increase in interest rates.
While the Fed attempts to slow the economy to curb inflation, government deficit spending surged this year. Although massive government spending may delay the recession, it thwarts the Fed's effort to curb inflation and adds to our long-term structural imbalances.
Investors are ebullient that the Fed has orchestrated a soft landing, yet corporate profits have declined for three consecutive quarters, and the leading economic indicators continue to deteriorate. Since monetary policy acts with a lag, and credit growth will continue to decline due to the regional bank crisis, we expect economic growth to slow and corporate profits to disappoint.
Should Investors Sell in May and Go Away? We believe the economy is on the verge of recession, and the next leg of the Bear Market is imminent.
Stocks have a poor risk-reward and offer a historically low equity risk premium. A 4.9% risk-free rate is great.
Stocks are in a bear market, and we estimate that the economy will enter a mild recession this year.
The S&P 500 rallied 17% higher over the past 8-weeks due to favorable seasonality and positive fund flows. We expect the bear market to resume when the year-end rally ends in January.
The Fed's mistakes created the worst year for balanced investors since the Great Depression. Is the worst over?
Don't Fight the FED!
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