Stocks fell 5% last week due to surging interest rates and renewed concerns about an upcoming recession.
We do not believe the bear market is over because:
1. Macro conditions today are worse than in June, while the market has only fallen back to June lows. In particular, real interest rates are higher now than in June, which suggests lower valuations are needed.
2. The economy continues to slow down with no end in sight. The pessimistic, or perhaps realistic, view is that a global recession will last all of 2023, which should lead to a top-to-bottom stock market decline of 30-40%.
3. Although the market has fallen 24% this year, some models indicate it should have fallen at least 30%, so the market may have become more expensive this year despite the fall.
4. The market rarely bottoms before the economy.
We have a target of 3000 for the $SPX500 and would buy aggressively around that level.
However, no one should expect the easy money days of the 2010-2021 period to return even if the index falls to 3000. We believe that the 2020s will be characterised by high inflation, macro volatility, high interest rates, mediocre stock market returns, and a rangebound $SPX500 . In this environment, generating alpha over the index will be critical, and we believe sources of outperformance will be found in value stocks and commodities. The winners of the past decade, by contrast, such as tech stocks, will produce poor returns, in our view.