May 20, 2022
Good morning,
Many have referred to the current market as the Great Unwind – paying back the extra ordinary market gains resulting from the massive stimulus over the past two years. There is some good news on the degree-of-Unwind front, specifically the excessive speculation seen in the last cycle.
Margin debt has plunged to below zero growth. The S&P 500 P/E ratio has plunged from a record high of around 31 to just 19.6 times earnings. That is still above the 15.1 times average, and I think it’s fair to have some questions on the E (earnings), but the point is much of the over-valuation at 31 times has been unwound. CEO confidence has plunged which has historically been consistent with earnings problems but it’s another indicator of speculative excess that has been wrung out.
This is not a bottom call but rather a suggestion that much of the Unwind from the Modern Monetary Policy experiment of 2020 has been done. With volatility still elevated (VIX >30), big market swings are still likely to eat away at investor confidence. Choppiness ahead for a period still seems likely, but the proximity of the bottom may not be far away in magnitude, if not time.
Have a good weekend.
Be well,
Mike