The chart shows that inflationary conditions, as seen last in the 1970s, are highly damaging for equity valuations. The average valuation for equities is more than 50% below the current level as measured by average 10 year earning
Economic policy in increasingly on tilt and muddled at best. Perhaps the issues of inflation and interest rates will resolve themselves and turn out to be temporary, but stable and healthy growth and inflation outcomes still appear to be a major uncertainty and investment accounts will need constant attention.
Typically stocks bottom well after the first interest rate cut, which may much longer than investors realize.
Given the debt levels, it will be much more difficult to reach the real interest rates levels needed to contain inflation.
The standard equity and bond allocation has been disastrous in 2022.
Investors who do not manage risk and drawdowns, have challenging compounding consequences.
Despite the extremes in historically reliable valuation measures, we can be certain of one thing: investors don’t care. They never do at market extremes. If they did, the financial markets could never reach extremes like 1929, 2000, and today in the first place…..What’s odd is how adamant investors seem to be not only that profit margins will remain above average, but that they will not retreat even from current extremes. Have investors looked at where margins are here? They’re not just higher than the historical norm – they’re higher than at every point in history prior to the past two years. Yet Wall Street analysts describe P/E ratios as “cheap” and “reasonable” without a moment’s hesitation about the denominator.
John Hussman
The Fed may benefit from adding QT and liquidity management to its interest rate tool, but this will likely be a direct hit on the stock market….
A healthy market and economy can’t continue for long without access to ample credit. The Bank stocks have been underperforming for well over 3 years. Far longer than they did just before 2000 and 2008.
What has become clear over the last month is that while central banks have been raising rates to contain inflation, the growth outlook has continued to deteriorate. Of key importance is that credit lending has materially shifted to tightening.
This is a challenging overall negative atmosphere, but there will always be rewarding proactive cyclical opportunities to grow wealth. A Best Investor approach with careful risk management techniques provides the optimal performance in any environment. As in sport, the best performance requires having a gameplan for both offense and defense. The key to success is understanding the relationship of business cycles and financial asset classes.
Although the Fed admits they have little understanding about inflation they believe they are now fully on it.
At the same time as they are tightening aggressively to contain inflation, they now seem unaware of the economic track record of doing this in an economic slowdown that Fed Chair Powell says he does not see.
The evidence strongly suggests that tightening into a slowdown will simply deepen the downturn. Now the European Central Bank (ECB) has joined this tragic trajectory, in even more challenging circumstances.
Investing like the best can lower your stress and risk levels while bringing you higher, long-term returns. It can provide a stable platform for planning and give you more financial security now and for the rest of your life. Let’s get started.