What the f#k is going on in the world?!?!?
PART 2... A sequel to my first macro thread I wrote on July 23rd. With fresh data, insights and what to expect for crypto and risk markets heading into 2023....
Have a read through my Part 1 thread below where I lay the groundwork for this ultimate macro series. There are still plenty of strong headwinds for risk assets, but can we see the light at the end of the tunnel?
Let’s dive into the data and break it down into the following sections
INFLATION
INTEREST RATES
UNEMPLOYMENT
YIELD CURVES/ RECESSIONS
GDP
HISTORICAL BOTTOMS
TLDR/ OUTLOOK
INFLATION
Inflation is still stubbornly sitting at 40-year highs. In September, US Inflation came in at 8.2% and core (excluding energy and food) came in at 6.6%. While overall inflation is coming down from its peak, core inflation is still going up which is concerning
The Fed seems more interested in core inflation so I don't expect a pivot until we see that coming down. Looking back at previous bear markets, the S&P 500 bottoms once inflation has peaked. I will be keenly watching the next FOMC on 2nd November and J. Powells comments.
INTEREST RATES
The FED have been raising rates at the fastest pace IN HISTORY. This has been the major catalyst in the sell-off of risk assets throughout 2022. The current federal funds rate is at 3.0 – 3.25% and there is a good probability (84% according to CME) of a 75bp rate in November, bringing the FFR to 3.75-4.0%. The market is also pricing in hikes in December and Feb 2023 so there is a good chance we will hit 5% by early 2023. Previous rate hiking cycles have always been conducted in the face of a growing economy (S&P 500 going up). The fed is usally forced to pivot when the economy starts weakening/ unemployment goes up. However, this time around, the Fed are raising rates into a weakening economy.
UNEMPLOYMENT
The current unemployment rate (Sep 2022) is sitting at 3.5%- a historically low number. The Feds dual mandate is stable prices and low unemployment. So with inflation high and unemployment low, plenty of runway to continue raising rates to dampen demand. Past recessions were all accompanied by rising unemployment rates. But we are yet to see this in the current bear market. In the majority of prior bear markets, the S&P 500 bottoms BEFORE the unemployment rate peaks. This makes sense as markets are forward looking.
YIELD CURVES/ RECESSIONS
A strong indicator of an upcoming recession is an inversion of the yield curve (10-2y or 10-3m). We have just seen an inversion on BOTH of these. It seems increasingly likely we are heading into a recession.
It is interesting to note that in all but one bear market (Dot com crash), the S&P 500 bottoms DURING the recession (grey shaded areas).
GDP
The 3rd quarter GDP numbers surprised to upside and came in at 2.6%. After two quarters of negative growth in Q1-Q2. But a lot of people are attributing that to the US draining the strategic petroleum reserves, mid-term elections and narrowing trade gap.
HISTORICAL BOTTOMS
Let’s compare to previous bear markets. Although History never repeats, it often rhymes.
GFC - An eerily similar trajectory of the current 2022 bear (blue) to the GFC from ’08-’09. If we were to follow this path, we are only about half way through the pain.
Dotcom crash (2000-2002) - This is quite a scary comparison and I don’t necessarily think the current bear will play out like this. But nonetheless, important to consider how this would feel if it did.
1980-1982 - This is also a bear market that was born in an inflationary period similar to where we find ourselves today. It is interesting to see that the 1980 bear does not go much lower than where we currently sit, but it chops sideways for a while longer.
If you overlay a number of bear markets, you can see that the current (2022) in dark blue is relatively small compared to others. This gives some historical perspective.
TLDR
We have looked at a number of important data points and reflected on previous cyclical bear markets. Here are my key takeaways.
a) Inflation remains sticky and the Fed remains Hawkish
b) Fed likely to continue raising rates until 2023- maybe then a pause before full pivot
c) Unemployment remains low so the Fed has plenty of runway to keep raising
d) Markets generally bottom when
Inflation has peaked
BEFORE unemployment has peaked
During a recession
It is so important to stay agile in your thinking. If the data changes, you must reassess you’re thinking on the fly. In this day and age of lightning information flow, things change fast. I am no macro-economic expert and have gleaned a lot of this information from reading/ listening to the following people
A lot of my charts I have from Ben’s website and I highly recommend you check out his YT channel and video below.