Link to article written 2 May 2022
Giving an update based on the latest development on the macro front globally.
In view of the high CPI numbers released at 8.6%, I am revising higher, on my expectation of a possible global recession as a result. The possible time period is 4Q 2022 to 1Q 2023.
I believe that the FED may need to do more to tame the elevated inflationary numbers in the next coming few months, which may inadvertently, caused a slowdown in the US economic growth.
However, I believed that the market is somewhere close to the lows. Based on the table below, the last time that the market experienced an inflation problem was in the 1980s. That particular time, Volcker, who was the FED chairman then, hiked interest rates aggressively to bring down inflation; and the economy together with it. The S&P 500 pulled back a total of 27.1% then. Currently, S&P has pulled back a total of 22% from its peak in November 2021.
Nobody will be able to catch the lows of the market. But I am just going to put a ballpark of somewhere near 3,800, which is equivalent to 16x forward PE, below the 10-year average of 16.9x. I believe that the market should find some good support at this current level.
There are some technical analysts that commented that a possible breakdown towards 3,500 is possible but I put that probability to below 5%. why? If the S&P goes to 3,500, it would mean that the total pullback will be 28% (worse than the one we had in 1980s in which the labour market now in the US is much stronger) and a forward PE of 14.75x, which is very pessimistic, as historical average of 15-year is 15.5x, 20-year is 15.5x as well and 25-year is 16.5x. So I believe that S&P 500 will not be going down to 3,500 level.
I have written about this on my market commentary on the 17th of May 2022 and the link here.
What should Investors be doing?
The number one thing to note is to stay calm. Try to understand the numbers that I have presented above. This should give you a general direction as to where we are at this moment of time and not to panic sell. Take note that the market has already started to price in a recession at this current level and thus, I believe that the downside is capped based on the forward EPS of the S&P500.
Its only the 3rd time since the Global Financial Crisis that the market is offering good discount on some of the big tech names. Do take note that these companies are generating good cashflow quarters over quarters and also enjoying some sort of a monopoly in the space that they are operating in. Thus, take this opportunity to buy into them cheaply.
Based on the psychological front, we can feel that market sentiments are very weak now with media flooded with doomsday story. There is even one article that said that the writer is feeling like Global Financial Crisis once again in which I differ. I was in the market then as a sales trader with DBS and those times, it was so much worse then what we are experiencing today. Media outlets’ KPI is getting as many readers as possible and they know that the market is fearful. So in order to get more readership, they may need to dramatize their articles to attract more readership. But if they are to be a good gauge of where we are, I think the quantity of doomsday report in the market is telling me that the bottom is near. As famous investor, Warren Buffett had put it, when there is fear on the streets, be greedy. It is ultimately these fear that create mispricing in the market place (Buffett refers this to margin of safety) that creates opportunities for mid to long term investors.
Hope this helps and have a great week ahead.