May 18, 2022
Good morning,
Macroeconomics: study of the behavior and performance of an economy as a whole. It is one of the four branches of Technical/Quantitative analysis (Fundamental, Technical, Behavioral and Macro). It is the branch that is concerned mostly with Fiscal and Monetary Policy and like all the other branches of T/Q Analysis, there are times when it leads the other three in importance, and times when it doesn’t.
If there ever was an example of how much government stimulus influences markets, 2020 would be it. The economy shrank 31.2% in Q2 2020, but because the government committed to unprecedented fiscal spending and the easiest monetary policy in history, the S&P 500 recovered all its pandemic losses within six months. The previous record for the quickest roundtrip from a 30% drop was 23 months after the 1987 crash.
The bill for the record stimulus is coming due in the form of the fastest inflation in over 40 years. The government is responding with the biggest year/year decline in stimulus in at least 48 years. The Fed has shifted quickly from its Zero Interest Rate Program and Quantitative Easing to raising rates and Quantitative Tightening. The question for investors is how much of the reversal in macro-policy is priced into the markets already. For the purposes of analysis, and not fear mongering, let’s label the current market a bear market, and compare it to previous bear markets. The bottom line is that P/E multiples have compressed in the current market close to or more than during the average bear market. With most Nasdaq and small-cap stocks below their pre-Covid highs, one could argue that the unwind of 2020’s macro-policy has been priced into the market at current levels (last week’s lows).
The next question for investors is whether the Fed can orchestrate a soft landing – in other words, not push the economy into a recession. It’s an open question for markets at this point and as mentioned before, the coming weeks may be very volatile as markets discount the soft-landing campers view vs the arguments for a hard landing – assuming current prices reflect the full effects of the unwind.
Be well,
Mike