“How much worse can it get,” many of you are likely asking after Friday’s close. After all, the market is down 8% this month alone and and the NASDAQ, S&P and Dow are down -32%, -24% and -20% year-to-date, respectively.
The answer to the completely made up question I imagined you asking to yourself moments ago is this: If the Fed continues to hold course and posture the way it has, it can get much, much worse.
Putting aside the obvious - that there are record debt levels outstanding with the quickest pace of rate hikes we have seen in forever - let’s just calibrate our senses here for a moment.
As I mentioned during an hour-long interview I did yesterday, we are still not even lower than the pre-Covid highs the market had put in. Here’s the NASDAQ, for example:
And if you recall correctly, going into Covid the attitude was that we were at nosebleed valuations. In other words, no one would have been surprised if we had corrected 30% or more from there just on valuations without a catalyst.
As The Leuthold Group pointed out on Twitter Friday afternoon, the S&P’s current PE ratio is still almost double what it has been on a median basis of all bear markets dating back nearly 70 years.
A 30% drawdown from pre-Covid highs would mean the market still has close to 40-45% downside from here. A return to the median PE of 13.6x shown in the chart above would result in the same. We haven’t seen the pain of recessions past at all. Market veteran Jim Chanos made that clear today:
And while there have been scattered headlines - one here from Gasparino and one here from earlier this week - about the Fed paying closer attention, that doesn’t guarantee that the train wreck hasn’t already happened and isn’t just waiting to surface.
The point of this post is to remind you not to necessarily get comfortable buying the dip. Arguably, we haven’t even seen a “dip” yet. That’s how large this bubble was before inflation popped it. I said yesterday that the problem with bear market rallies is that everyone is always trying to pick a bottom. It is only after everyone is certain we have seen a bottom - and THEN the floor drops out - that we see sheer panic and real pain.
And again, it is all up to the Fed. I wrote this week at length about the Bank of England capitulating and going back to QE, and whether or not the Fed could do the same. That piece is here. My friend Kenny Polcari thinks that a Fed pivot simply isn’t happening.
I’d love to hear your thoughts below - but this weekend, while sipping your wine at your fall festivals and picking pumpkins with the family, just keep in the back of your mind: depending on what the Fed does, everything could still be completely fucked from here.
Have a great weekend.
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