“The Fed Has No Idea How Bad It Is Out There” So Here’s Some Context…
To quote Jim Cramer circa August 2007, “the Fed has no idea how bad it is out there” and 15 years later his rant is just as applicable, in a market that has rarely been uglier. So to help the Fed – and all those other traders who still refuse to panic even though they probably should (according to Goldman, over the past 15 years, there have been 36 daily selloffs of 4% or more, and the VIX was never as low as it was on Wednesday), here’s some context courtesy of DB’s Jim Reid to show just how bad it is.
Quoting DB’s chief equity strategist, Binky Chadha, Reid notes that the current -18.7% correction is actually the 6th largest non-recession (so far) correction in post WWII history, only behind > July-98 (around LTCM and Russia default), > Sept-18 (QT and Fed hikes finally bite), > May-46 (post WWII), > Dec-61 (so called Kennedy slide) and finally > Aug-87 (including the Oct-87 crash).
Of course, if one includes recessions, there are fifteen larger post WWII sell-offs with the median recession sell-off at -23.9%.
From here, the Deutsche Banker – who alone among his Wall Street peers has forecast a US recession in 2023 – expects the US to move towards the average recession decline in the near term which would put the S&P 500 at 3650 (current 3900), a similar near-term view to that of Morgan Stanley’s Michael Wilson.
At this point, markets become remarkably binary.
In the event we do slide into recession, the Deutsche Bank strategists see the sell-off going well above average, i.e., into the upper half of the historical range given elevated initial overvaluation. This means -35% to -40% or S&P 500 at 3000.
However, in the event we do not and growth and the labor market hold up in 2022 – which they won’t – they expect the market to rally back to 4700-4800 by year-end as equity positioning rebounds from very low levels.
And just to add another twist, while Binky’s baseline view is that the economy doesn’t slide into recession this year and the S&P 500 ends the year at 4750. However, that’s before the economy does slide into a recession next year.
So clearly, Jim writes, “if the recession then comes in 2023 markets can again price in a recession and see dramatic falls”, meaning non-stop market rollercoasters for the next two years.
Indeed, as Reid concludes, “one thing is clear. This is not a market for the faint hearted!”
There is more in the full piece from Binky Chadha for valuations, sell-offs in historical context, signs of late (but not yet end) cycle, sector analysis and positioning, available to professional subs in the usual place.
Sun, 05/22/2022 – 18:25