— My title emanates from a year-end editorial header in a well-regarded financial magazine.
— When all else fails to convey the gravity of the moment, invoke in the astrologer.
— Warren Buffett commentary on gravity and rates worth considering
— Bifurcation in reverse
“Second verse same as the first or Wax on Wax off”
I.e., as we enter 2023 the same tried and true (maybe untrue) market concerns that plagued us last year are with us again … the Fed, interest rates and, tangentially, employment. The publication of the minutes of the Fed OMC meeting in December offered nothing new. As chairman Powell said on December 14, ‘rates are likely to be higher, longer’ (the market went down). His words were affirmed in the reading of the minutes of the OMC meeting last Tuesday, January 3(the market also went down).
We received a reinforcing jolt on Thursday morning upon the release of the ADP private employment numbers that showed a surprising increase of 235,000 in payroll growth (expectation was 153,000) (the market went down). To add insult to injury, for shame, wages were up too.
Good news is bad news for the folks looking for the Fed’s 4% bump (since March) in the Fed funds rate to have had a more significant effect slowing the economy and knocking down inflation. But dig a little deeper. Although the trailing 12 month CPI inflation number through November was 7.1%, the 6 month trailing rate was only 2.4%. This would indicate that the program was working, so far, without a huge impact on employment. Hmm. What could possibly happen to stock prices if this phenomenon persists?
For the media and pundits this is too deep a dig. The bearishness continues as they focus on the concept that these good job numbers are a harbinger of more rate increases, increases that need to impact jobs. Their reaction continues to be the same old tune or Mr. Miyagi’s karate instruction … “Wax on … wax off … repeat.” Nothing changes in the calculus.
When all else fails call in the astrologer
Of course this is tongue-in-cheek on my part but an article did show up last weekend with this title (the title of this week’s posting on kortseesions.com). I have not been able to find it. It might have been pulled down because the publication used the same gambit back in 2016 and I wrote about it. (More bad news folks, Mercury is in retrograde — May 2, 2016 –S&P 500 = 2081.43)
When Mercury is in retrograde, according to the astrology crowd, it is not a good time to make decisions about finances, love, communicating, contracting or just about any human enterprise. Thank you Angela Fritz (atmospheric scientist and WP Deputy Weather editor) and the Washington Post for educating me on this (People are freaking out about ‘Mercury in retrograde.’ …). If you are not completely turned away from investing by this fearful happening it is important to know that because Mercury orbits around the Sun several times a month these conditions persist throughout the year.
Buffett on gravity, interest rates and the market
Warren Buffett asserts that interest rates act as a gravitational pull on stock valuations. He maintains that when rates are very low they exert very little pull. He posits that if you knew that rates would be zero forever, then it would be easy to justify stocks selling at 100 or more times earnings. There would be no pull and no return competition for stocks. This appears to be the assumption that the ‘growth and innovation’ crowd has been working with the past few years. On the other hand when rates are very high, such as those we saw back in 1982 (15% 10-year Treasuries), there would be a tremendous gravitational pull on valuations. We saw this during that same time period when the PE on the S&P 500’s trailing-twelve-month earnings went to 8X.
You may find the following statistic to be of some comfort. According to Trading Economics, the Federal Funds rate in the US has (d) averaged 5.88% between 1971 and 2016 — FF currently 4.5%. In March of 1980 the FF peaked at 20%. We survived all of this with a 32-fold increase (36 fold at peak–1/5/2022)in the Dow Jones Industrials. The effective FF rate rate May of 2016 was .37%. It was doubtful then that even a 1.00% increase in the FF rate over the next year would exert much gravitational pull on valuations, especially if it was accompanied by a more vital economy. May 2, 2016 the S&P 500 closed at 2081.43. It now stands 3895.08 down from its all-time-high of 4818.62 (January 4 ,2022).The exact same concerns re.: raising rates were in place six years ago. Bifurcation in Reverse
If you were involved in meme stocks or the high multiple, growth and innovation names, you have been badly damaged by this run-up in rates. Regardless of valuation many stocks that did not participate in the mania got hammered. It was guilt by association.They were common stocks(reasonably valued or not). As such, many babies have been thrown out with the bath water. As inflation abates these ‘babies’, the majority of which were shunned during the past few years (bifurcation favoring tech), represent significant investment opportunities. ‘Wax on. Wax off. Repeat’ may not apply to the vast majority of stocks where valuations did not become stratospheric … Bifurcation in reverse!
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