Where does the stock market go from here? Well, the S&P500 is on pace to report negative earnings growth for 2022. This is one of the first signs that a weakening labour market lies ahead. Monetary policy always takes time but the end result is always the same.
>>Inflationary pressures build in the system. Fed funds rate increases.
>>companies hoard labour (unemployment rate lowers)
>> soft landing narrative builds momentum
>> companies pass costs to consumers
>> profit margins shrink and earnings fall
>> companies lay off people to stabilize profit margins. Fed funds peak
>> unemployment rate increases, recession begins.
>> inflations falls hard. Fed Funds decreases.
This has been the same story line for every boom and bust cycle in history.
Here is my prediction for 2023:
The recession begins in Q3. This is supported mainly by 2 reasons.
1) The debt ceiling being raised by mid year
2) quantitative tightening working in the background
In addition, historically speaking, the recession begins around 2-3 months after the Fed Funds has peaked. Moreover, the 2 year treasury yield is falling hard which is not a good sign for equities. When the yield curve steepens, I.e, the change in 2 year treasuries is greater than the change in 10 year treasuries, then a recession warning sign has been flashed.
Inflation is going to return to 2% by mid 2024 and drop below 2% by end of 2024. Unemployment is going to increase by 2.5% from trough levels and reach ~ 6% in the US which would be comparable to the 1990 recession. The money supply is shrinking at the fastest rate in modern history. There is reason to believe inflation will be lower than 2% by end of 2024 as it never mean reverts to the mean.
My belief is that the stock market will bottom in the second half of the year and the S&P 500 will get to around 3000-3300. This is supported by both a contraction in earnings and a contraction in P/E multiples during a recession.
The good news is that inflation is coming down :)