The Bottom of the Market Crash | WARNING.

stifel has a fantastic research piece

out on are we potentially at the bottom

of the market what is the trend likely

going to look like for inflation and

let's look at some charts to see if they

can guide us because right now things

look pretty tense many of you already

know but in case you don't I'll catch

you up I personally think markets

bottomed uh likely around October knock

on wood some stocks obviously bottomed

around June and I think we're in a Nike

Swoosh style recovery where we went down

relatively quickly and we're going to

have a slow but very volatile sort of

grow up and that's mostly because I

believe markets today are going to try

to price in the bottom of the market

sooner than what the bottom of the

market May typically occur and the

reason I think that is because the

internet has done a very good job of

suggesting that the bottom of the market

is usually in alignment with when the

recession starts

but if markets know that then they'll

buy before the bottom of when the

recession starts and I think thanks to

the internet we're actually going to see

a slight move up this time around but

that's my opinion

keep that in mind catch you up to speed

let's now take a peek at

This research piece and let's see what

they think

so what do we have here Cecil Equity

strategists suggests the following

they see the S P 500 by mid-2023

at 4 100. right now the S P 500 is

sitting at 3970. uh potentially uh all

the way up to 4 300 leading to a

midpoint of 4200 and they believe that

stocks actually fell last year in line

with a recession

now this particular chart is fascinating

what they did is they took the S P 500

on an inflation-adjusted basis now

that's important because obviously we've

had very high inflation

and they took this on an

inflation-adjusted basis

and uh they they drew basically your S P

500 so this little black up and down

right here that's the s p 500. the green

line here is the 200-day moving average

now if you go back to World War II and

you look at all 13 recession bear

markets and you take those on an

inflation-adjusted basis which includes

the inflation-adjusted bear markets of

the 1970s

you tend to see that stocks fall on the

S P 500 by about

32 percent

and take a look at the intraday low

October 13th 2022.

it is about 32 down

so on an inflation-adjusted basis

you could actually already start to see

the formation of the Nike Swoosh

so if I were to draw it with a light

blue pencil here you see the down uh

let's make that substantially larger so

we can actually see it there we go you

can see the down

and let's do that a little better here

let's do something like this let's go

there we go so we have our Nike swooshed

down

and then hopefully

we have a nice slower recovery that then

extends potentially for the rest of the

decade with obviously a lot of

volatility that's my expectation and my

thesis and this chart here on the left

actually somewhat aligns with that idea

but let's see what else they have

so first they give us this breakdown of

what the federal reserve's projections

are the fed's projections are right here

that interest rates are going to sit

right around 5.1 percent uh at least

until about June

well if we look at what the markets were

pricing in before the failure of Silicon

Valley Bank you can actually see markets

were pricing in a lot more of an

aggressive fed much higher as high as

5.5 to 5.8 percent

and that's interesting because Mr

Bullard actually one of the Hawks over

at the FED just came out

and suggested that the terminal rate

should be

5.625 percent

now I think that's interesting coming

from a hawk because that's actually

dovish now you might think that's wild

but get this for a moment just last year

Mr Bullard suggested hey interest rates

might end up being between five and

seven percent all right well between

five and seven percent implies a

midpoint of six percent right and where

folks is

5.625 percent

right here it's on the left side it's a

left tail it is dovish that's

fascinating to consider that one of the

Hawks at the FED even though he's

talking about

a being

bearish and hawkish and suggesting we

need to do even more than what we've

already done what does he suggest

less Hawk then previously assumed it's

interesting

but what's also interesting is the

separation between what the market is

now pricing in for the end of the year

uh at the end of 2023 we're pricing in

almost 100 basis points of cuts and so

you could see how the market how

volatile the market is this is where the

FED is

this is where the market was

this is where the market is now it's a

huge difference

let's keep going

this right here

is uh sort of a question about what what

do we think the bear case is here right

what what what is the long-term Trend if

we try to take out some of the

insaneness of the last few years we'll

take a look at this chart

this chart here suggests that over time

since 1976 we have experienced a

reduction a substantial reduction in the

real rate of interest or should I say

the neutral rate the neutral rate has

slowly trended down here's the midpoint

the black dotted line in the middle uh

one standard deviation up the red one

standard deviation down though at Green

and what we could see is

a a really a a picture of uh somewhere

around

90s what 90 something percent uh of uh

well this is uh there's two standard

deviations here's the the bulk of

results

occur uh Within These bands and you

could see that the trend is lower

interest rates over time now yes

inflation has gone up and real yields

have risen you could see that here on

the right

but they're actually not outside or or

really far outside I mean we've popped

over a little bit here here here here

they're really not outside far outside

the long-term Trend and so potentially

you were just going to see a reversion

to zero percent rates and we're actually

going to be right back to zerp zero

interest

um

uh zero zero percent interest rates but

anyway

this idea that we're gonna have high

inflation for a long period of time and

high rates for a long period of time

really stands in the face of what has

been happening over the last 45 years

this chart shows you rates over the last

45 years yes they are volatile but look

at how they even absorb the inflation

that occurred not only in the mid 90s

which was more nominal but the inflation

that occurred in the uh the late 70s

they do leave a little note here they

say unwinding 23 years it's even more

than this when we go all the way back in

the chart but anyway unwinding 23 years

of low real yields is a heavy lift which

would crush the financial system so

scary warning here

now here they talk about the

contribution of how CPI is made up now

this is a neat chart because at first if

you look at core services with shelter

here the green you can see the green is

expanding and that's really scary that

the green is expanding right

because Jerome Powell says hike until

Services go down

but if you actually look at core

Services minus inflation you can see

there's already been an inflection point

core Services minus inflation has

already started to decline which is

fantastic

the only thing that's propping up core

Services right now is housing

however we expect that housing will

plummet and when this section here goes

negative which it will sometime this

year what's left of CPI will be very

very nominal

so we're excited to see uh that progress

happen it hasn't happened quite yet and

here you can see core Services excluding

inflation we have inflected and the

trend is down it's just a matter now of

how long it takes but it does seem like

we have hit peak in fact take a look at

this

in uh in the green line here we see

pre-1980 high inflation versus the Blue

Line low inflation post 1980 for what

they call inflation Cycles

and they line up Peak to low and they

tell you roughly how long it's going to

take to get inflation down

and what do we see here

well we see we're at the red line right

here and we might be in about at the

level of about eight months of inflation

declines right now

we might have another 10 months to go

which really puts us at about January

2024 for being back to potentially if

this sort of trend holds uh some four

percent inflation and uh and and

hopefully back to that longer term Trend

soon that'll be very exciting to get

inflation down I can't wait to read

inflation reports and actually see them

go negative

[Music]

someone here asks what's your take on

market conditions if we head into a

deflationary Time

uh which looks to be the case well

I think deflation rewards uh technology

in fact there's a chart here I'll jump

to it for you look at that I'm jumping

ahead three or four slides just for you

and I appreciate y'all seriously thank

you by the way for coming and joining

this early on a Saturday morning you

have to be insane to be up this early

and therefore I appreciate you because I

too am insane we are the same

all right what do we got over here

so

they tell you here in a disinflationary

boom which is when you have strong

economic growth and low inflation what

actually does well are media

entertainment software Services

semiconductors Tech retailing and autos

Tesla Nvidia TSM

cloudflare crowdstrike Salesforce right

our favorites

a favorite Innovation strategies do very

very well in a disinflationary boom

problem is you don't want to be in a

situation where you're here that's

stagflation which is where you have weak

economic growth and high inflation

now they suggest in these environments

consumer services Health Care household

and personal products basically Staples

do well

I actually think that the fear of

stagflation is exactly why food like

McDonald's or Staples or Costco or

whatever did so well over the last year

but I don't think that is going to last

I think we are going to see a transition

from stagflation

two disinflation and a boom especially

when we start turning the money printer

on again

uh so a good good question thank you for

that

uh let's see which other charts were

important okay here we go history

suggests the S P 500 is in a broad

trading range until a recession is more

clear

now this is interesting because as we've

said the stock market usually doesn't

bottom until shortly after

a recession begins

unfortunately we don't know when we're

in a recession until sometimes

six to 18 months after the recession has

actually started it's sort of hindsight

analysis it's it's very frustrating how

delayed recessionary estimates are

but this idea that stocks potentially

have another 10 to 15 percent to fall

is uh is concerning should be concerning

for long-term investors because you

really suggest that well the recession

should begin here in month two in month

three and a half now is it possible that

we could go back and revise uh Q4 and

suggest we were in a recession in Q4 see

stocks dropped

yeah I mean technically it is

technically we could have been

considered to be in a recession in Q4

but it's unlikely with how unemployment

was uh and uh and and how much growth we

still had so it's unlikely but uh it's

also possible that

we try to front run this let's make it

an example here let's say we think that

the recession will start Q3 that's what

a lot of folks think so let's say June

June 23.

that would put the bottom of the market

probably in historical context around

August

to another two months later so October

so that would say bottom is Aug October

well

if markets are so convinced of this

today

is it not possible that

this time around uh markets could

pre-price in some of that pain sure it's

possible but does that mean it would be

possible all the way back to October of

2022 who knows and so it all depends on

where that recession starts but the

problem is because we don't know when

the official definition of recession

starts when that time comes could be

this quarter for goodness sakes

uh who knows since we don't know when

this comes it's very difficult to look

at this chart and suggest

any kind of action it it doesn't seem

like the right thing to do it in fact

right now it seems almost as if the

right thing to do is nothing but look at

what's doing actually well right now in

2023 it's the disinflationary boom

stocks

those have done very well so far in 2023

and uh Financial conditions

are actually a pretty big deal uh

Financial conditions are made up by a

lot of different things and those are

going to be uh something the FED takes a

peek at deeply but here are what

Financial conditions look like they take

your your tip seals your breakevens your

dollar ratios on on the stock market and

uh we could see that in recessions you

usually get a spike in the 10-year

treasury Ultra secure and B Double A

bonds which are less secure B Double A

is is you know less uh less than

obviously your your a ratings uh like

your let's say your AAA Bond uh B Double

A is is usually the lowest form of

investment grade debt uh this is usually

a Moody's definition and it puts you

around a medium risk so it's not like a

high risk junk bond but usually what you

see is you see medium risk bonds become

very expensive offensive as a leading

indicator to recessions

and potentially that exactly is what

we're starting to see right here

happening again but I think it's a

foregone conclusion honestly that we're

going to go into recession uh in other

words in English I I think we expect to

go into a recession at this point now

personally I find all of this very

reiterating and mostly I think this is

reiterating because the decline in CPI

that we're forecasting is going to make

a massive or lead to a massive drop in

in our CPI reads specifically looking at

how much of that core Services segment

including housing is made up of by

housing as you can see the inflection

point is already in core Services X

shelter that's fantastic if you could

get the green to go negative which is

likely within the next six months

fantastic

is it also possible that we already had

our inflation-adjusted stock market

decline just like history suggests

while at the same time we have no idea

when that recession technically starts

in my opinion

this

set from stifle here makes me more

bullish on this particular strategy

which is a strategy that so far this

year has been outperforming but it's a

strategy on the right side which is

planning for the disinflationary boom

over the next 10 years now is it

possible we have a lot of volatility

absolutely absolutely

do I think we'll end up with stagflation

unlikely because stagflation suggests we

will end up with

such high inflation for so long

that uh that that the economy

essentially gets pushed into a deep

recession

now that's possible depending on credit

spreads or or credit tightening but I

think it's unlikely

and so I'm putting my money where my

mouth is obviously if you think

inflation is likely to stay high you

probably want to be in some of the lower

section sections where if you think we

have enough money to keep a strong

economy going which I do as well

but you think inflation is going to stay

high well that's where you'd probably

want to be in energy and materials

personally I wouldn't want to be in the

banks

but the beautiful thing is

a you could do whatever you want and B I

don't care what choice you make it

doesn't make a difference to me

so I would actually if I were you I'd

probably take a screenshot of this chart

right here

I suppose I I should add uh you know but

make sure to get the coupon code right

we should we should add that there you

go now you can take a screenshot don't

rewind and take a screenshot without

that there that's that's very important