How Bad the Global Market Recession will Get.

how much further do markets have to fall

well in this video we are going to go

through two potential scenarios one

scenario is an estimate of what happens

in years that are as bad as they have

been thus far in 2022 and what kind of

returns would we expect for the next

year after the sort of pain that we've

been through then we're going to go

ahead and look at a Citibank analysis in

terms of what three potential scenarios

we could run into in terms of market

returns and what to do in each of those

scenarios let's get right into that note

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let's look at the S P 500 the S P 500

has had its worst year in over 50 years

when we count the number of green days

there have been there have not been a

lot of green days as a result there have

been a lot of opportunities to follow

the psychology of money and buy on red

unfortunately just buying the dip has

turned into riding the Fallen knife down

well folks could that potentially be

setting your portfolio up for grain for

next year let's take a look at this

report and then we'll get into the city

report take a look at this chart here

years with fewer updates than red days

uh tend to proceed years

with above average returns so in other

words in English when we have these

nasty years where positive days are less

than 50 percent look at what we have

here positive days or anywhere between

42 to about 45 anytime we have those

sorts of years uh we tend to see s p

returns which are vastly negative uh and

this makes sense right this year we're

at a 43.5 percent positive days and if

you look at the return for this year

we're at about negative 22 when you

compare that to the average or the

median you'll see that on average we're

actually down negative 19.7 percent so

we're down a little bit more than

average and on the median we're down

17.9 so by the middle we're also a

little bit exceeding the middle here now

the number of positive periods here has

really been once we've had one positive

Year and that was in 1982 which is a

little bit of a unique year because in

1982 was right sort of at the peak of

the Paul volcker transition where Paul

volcker's policies were starting to work

so you went from having like the worst

stock market crash in a year to a pivot

oh how nice that would be to basically a

large stock market rally towards the end

of the year but outside of that every

single year we have had less positive

days than red days has led to a red S P

500 and not by a little bit I mean we're

talking about having just maybe six

percent fewer green days than red days

and that's led to an average of 19.7

declines

so what typically happens the year after

and then let's get into those City Bank

scenarios by the way remember if you're

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right s p Returns the following year

here you go look at this on average

folks after this sort of read the 12

months thereafter return on average 12.5

percent in the middle or on the median

17.3 percent or clearly green most of

the time in fact we were only red twice

the times we were red were right at the

beginning of sort of the inflationary

disasters of 1973 right when we left the

gold standards uh when we left the gold

standard and we had an oil a war as well

as price control issues and uh once

again in

1931 after the Great Depression here but

otherwise you've had relatively green

years thereafter so if there's any

potential sign of hope it's that hey

the next 12 months should be better than

the last 12 months okay good A little

hopium is always good so what kind of

scenarios do we have from Citibank

all right in the Citibank Baseline

scenario central banks continue to

tighten policy through the end of the

year and maintain their restrictive

stance against inflation at six percent

globally inflation double the historic

average remaining uncomfortably High the

global economy therefore then continues

to lose steam in slows materially as

elevated inflation further eats into

demand which if you watched my housing

video yesterday you'll see that we have

a massive issue with rental inflation

that could last for another year and a

half however remember also markets like

to find a bottom 6 to 12 months before

the bottom of the actual sort of economy

if you will anyway

as elevated inflation eats into demand

and high policy rates and Tighter

Financial conditions more broadly act to

slow growth over the next five quarters

we see global growth in this scenario

averaging around two and a quarter

percent slightly below a three percent

Trend but not abnormally low notably we

expect China's growth to accelerate to

around six percent next year interesting

excluding China's growth uh grow Global

growth would be around one percent so

they really see China as an opportunity

to provide for offsetting weakness

elsewhere and as a result of their

forecast they believe that Global

earnings per share so in other words on

average earnings per share across the

board will contract by about five

percent well folks so you can translate

this

if you have a 100 stock today that's

trading for a 10 times multiple with a

10 times earnings per share then a five

percent contraction would be a five

percent decline in the stock price that

makes sense to understand this a little

bit more relatively let's say your stock

was two hundred dollars and it also had

ten dollars of earnings

but it was trading for 20 times earnings

so phase one of a market crash is

multiple compression phase one is right

here the 20x turns into 10x right here

and then phase two is earnings

compression is how much further does it

go down now so in this case Citibank is

expecting an additional five percent set

of pain being possible in their hard

scenario they suggest that risk appetite

and asset prices fall sharply at the end

of the year in other words the worst

could still be ahead of us central banks

were spawned by providing liquidity this

is kind of like a United Kingdom

disaster almost suggesting that uh-oh

asset prices are going to be very slow

to recover here we have liquidity issues

the FED needs to bail out markets to

ensure Financial stability people lose

their jobs like Liz truss lost hers and

as demand falls off and inflation

pressures similarly come off the boil

most major economies fall into deep

downturns so this is sort of your

nominal downturn scenario this is your

deep downturn scenario here at the

bottom with a hard landing and growth

near zero they believe this synchronized

Global recession on top of an impact on

company profits would lead to earnings

declining by an additional 18 percent

and corporate earnings could actually

decline by as much as 31 percent

uh in which if if they were to align

with typical uh recessions like the last

three major recessions that we've seen

so that means their estimate of a hard

Landing of negative 18 might not

actually be as severe as the estimate

really should be

and so in this sort of scenario probably

don't want to be in the market but we'll

talk about what you want to do in all

these various different scenarios but as

you can see here an 18 decline versus a

five percent decline relatively rough in

the uh in the hard Landing scenario in

the soft Landing scenario inflation for

goods Falls quickly by the end of the

year that means Services could remain

high like for example owner's equivalent

rents and this would be consistent with

what we're actually seeing in Supply

chains easing container prices going

from twenty thousand dollars a container

to three thousand five hundred dollars a

container commodity prices falling like

steel aluminum copper Lumber but the

surprise is that Services spending also

quickly Falls and so when Services

spending Falls you see some inflationary

declines here which could reiterate

potentially a soft Landing that way you

have service spending moderating but not

collab sing and the demand for labor in

the services sector brings the job

market into balance so maybe not

necessarily unemployment's skyrocketing

but rather job openings being balanced

having as many job openings as you have

people willing and able to work an added

positive the winter passes without

another challenge of a new virus

emerging covid they can then maybe relax

via its covet zero policies in China and

central banks begin to ease in 2023 much

sooner than we currently expect the

result could be

a rising of global EPs and basically a

stock market rally and they suggest that

people who would benefit and that stocks

that lead the way will be cyclical

stocks like growth stocks and tech

stocks and investors hiding in more

defensive stocks would miss out

so how do we cast these three scenarios

on a table together right here

the implied earnings per share change

for the Glorious scenario

would be zero but we'd have a stock

market rally now they don't particularly

give us here how much we think we would

see in terms of a rally and this is

where it's nice to go back to this s p

return chart and suggest probably

somewhere around a middle between the

average and the median there let's go

with about 15.5 percent for a rally in

this soft Landing scenario and in this

rally scenario you potentially want to

chase the rallies and ultimately buy

cyclicals that have sold off anything

that moves with the business cycle so

anything that's been heavily sold off in

this last recession could could rebound

nicely whereas things that have

performed well like defensives like

energy Healthcare might not do as well

in the hard Landing scenario you want to

sell every single dip just get out of

the market get into defensives which

honestly right now is just cash remember

that 24 percent decline Lane scenario

City's current view is that you should

actually be buying the dips that the s p

is potentially going to outperform but

in the near term defensives will all

perform cyclicals and so if you want to

just be an index-based investor that

would be a way to get sort of a

diversified approach here

there's nothing necessarily wrong with

that but this gives you a breakdown of

three potential scenarios and some

hopium for the S P 500 going forward

which scenario do you think is most

likely and have you gone to madkevin.com

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