The End of the Affair

JP Morgan
By January 11, 2023 14:13

The End of the Affair

The affair with the market catalysts of the last decade is over now, and a new era of investing begins.

It was nice while it lasted. The tattered posters on the cover show the remnants of some equity market catalysts over much of the last decade and in particular 2020-2021: profitless innovation, the Fed’s quantitative easing, the discredited Western conceit of “geopolitical change through trade”, the cocktail napkin appeal of Modern Monetary Theory and massive fiscal stimulus, unsustainable negative real interest rates and “TINA” (there is no alternative to equities), the dream sequence of a rapid transition to renewable energy, the Potemkin village of many metaverse/fintech narratives and the pseudo-libertarian gibberish of unregulated crypto.  

The largest combined monetary and fiscal experiment in history is ending now, and a major growth slowdown is coming to the US and Europe. But: avoid the trap of becoming more bearish the lower the market gets, and be prepared to take advantage of selloffs when/if they occur. As shown below, in the history of US recessions (with the exception of the dot-com collapse of 2001), equity markets bottomed well before the bottom in GDP, payrolls, S&P 500 earnings and housing starts and the peak in household/corporate delinquencies. The ISM survey has been the most reliable coincident indicator of a bottom in equities, which is why we pay so much attention to it. If history is any guide, the equity bottom would also coincide with the end of Fed hikes. I expect equity markets to bottom sometime in the first half of next year, and for the October 2022 lows to hold.  

JP Morgan
By January 11, 2023 14:13

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