Green Book May 2022
Unfinished Business
Our tongue-in-cheek celebration of the bull market’s second birthday in late March looks premature. But the “Terrible Twos” we warned about have erupted in full force.
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Past Pivots Put Powell In A Predicament
Market conditions leading up to the May rate hike were similar (if not worse) than those that triggered Powell’s late-2018 “pivot.” Free-market tightening of 2022 is apt to play into the path of policy. There’s likely a dovish “pivot” in store later this year—one that may be aggressively sold rather than bought.
Not Dot-Com
Bulls have been quick to assure us that this market “bears” no resemblance to the dot-com bust. We agree—but probably for very different reasons. Among them are the conventional breadth measures, which provided little warning of this year’s January peak. And, the initial decline off January’s top has been much broader than during the first phase of the dot-com bust.
S&P 500 Downside?
The April haircut in the S&P 500 (-8.8%) combined with February and January losses brought a few of our 1995-to-date “Estimating The Downside” measures very close to their 27-year medians for the first time in recent memory. At present, downside to the median is now -16%. Based on 1957-to-date, the S&P 500’s estimated downside to the median is -30%.
Research Preview: Emerging Market Bonds
The U.S. Aggregate Bond Index lost 3.8% in April, bringing its year-to-date return to an agonizing -9.5%. The realization that bonds can lose big money, combined with the outlook for stubbornly high inflation and continued rate increases, is nudging bond investors to consider a wider scope of alternatives.
S&P 500: Kicked In The FAANGs
Those once high-flying FAANG stocks continue to run into rough pockets of air. Following Facebook’s 33% dive in February, Netflix (-49%), Amazon (-24%), and Google (-18%) followed suit in April as the latter two trillion-dollar firms posted their worst monthly returns since 2008. Only Apple—which still carries an enormous 7% weight in the S&P 500—has avoided a recent gut-wrenching plunge.
Speculative Growth Selloff: Near The End?
The group is back to where it was before the pandemonium began, both on a price and valuation basis. While the move is likely to overshoot below median and historical lows, we think we’re closer to the final chapter than the midpoint.
U.S. Dollar—Drivers & Impacts
Most U.S. dollar drivers point to a stronger dollar: attractiveness of U.S. assets; policy differentials; real interest-rate differentials; terms of trade; weaker Yuan; and capital flows/hedging activity. Speculative positioning, however, is a negative and suggests the dollar rally might at least take a pause in the near term.
Table of Contents
Stock Market
- Unfinished Business
- Past Pivots Put Powell In A Predicament
- The Case Of The Missing “Puts”
- Not Dot-Com
- Who Doesn’t Love A Sale?
- Peak EPS: Another Critique
- Stocks, Inflation, And Reverse Causality
- “Donuts”—The New Comfort Food
- Cycles: Is The Worst Yet To Come?
- History In The Making?
Of Special Interest
Macro Monitor
Quant
Market Internals
- Earnings Momentum
- Small Cap vs. Mid Cap vs. Large Cap
- Growth vs. Value vs. Cyclicals
- S&P 500: Kicked In The FAANGs
Portfolios
Major Trend
Estimating the Downside
At Random
Past Pivots Put Powell In A Predicament
Market conditions leading up to the May rate hike were similar (if not worse) than those that triggered Powell’s late-2018 “pivot.” Free-market tightening of 2022 is apt to play into the path of policy. There’s likely a dovish “pivot” in store later this year—one that may be aggressively sold rather than bought.
Not Dot-Com
Bulls have been quick to assure us that this market “bears” no resemblance to the dot-com bust. We agree—but probably for very different reasons. Among them are the conventional breadth measures, which provided little warning of this year’s January peak. And, the initial decline off January’s top has been much broader than during the first phase of the dot-com bust.
S&P 500 Downside?
The April haircut in the S&P 500 (-8.8%) combined with February and January losses brought a few of our 1995-to-date “Estimating The Downside” measures very close to their 27-year medians for the first time in recent memory. At present, downside to the median is now -16%. Based on 1957-to-date, the S&P 500’s estimated downside to the median is -30%.
Research Preview: Emerging Market Bonds
The U.S. Aggregate Bond Index lost 3.8% in April, bringing its year-to-date return to an agonizing -9.5%. The realization that bonds can lose big money, combined with the outlook for stubbornly high inflation and continued rate increases, is nudging bond investors to consider a wider scope of alternatives.
S&P 500: Kicked In The FAANGs
Those once high-flying FAANG stocks continue to run into rough pockets of air. Following Facebook’s 33% dive in February, Netflix (-49%), Amazon (-24%), and Google (-18%) followed suit in April as the latter two trillion-dollar firms posted their worst monthly returns since 2008. Only Apple—which still carries an enormous 7% weight in the S&P 500—has avoided a recent gut-wrenching plunge.
Speculative Growth Selloff: Near The End?
The group is back to where it was before the pandemonium began, both on a price and valuation basis. While the move is likely to overshoot below median and historical lows, we think we’re closer to the final chapter than the midpoint.
U.S. Dollar—Drivers & Impacts
Most U.S. dollar drivers point to a stronger dollar: attractiveness of U.S. assets; policy differentials; real interest-rate differentials; terms of trade; weaker Yuan; and capital flows/hedging activity. Speculative positioning, however, is a negative and suggests the dollar rally might at least take a pause in the near term.
Stock Market
- Unfinished Business
- Past Pivots Put Powell In A Predicament
- The Case Of The Missing “Puts”
- Not Dot-Com
- Who Doesn’t Love A Sale?
- Peak EPS: Another Critique
- Stocks, Inflation, And Reverse Causality
- “Donuts”—The New Comfort Food
- Cycles: Is The Worst Yet To Come?
- History In The Making?
Of Special Interest
Macro Monitor
Quant
Market Internals
- Earnings Momentum
- Small Cap vs. Mid Cap vs. Large Cap
- Growth vs. Value vs. Cyclicals
- S&P 500: Kicked In The FAANGs
Portfolios
Major Trend
Estimating the Downside
At Random
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