Bear markets and recessions, plus Goldman's 2023 outlook, inflation expectations, commodity prices, and the 2022 FIFA World Cup
The Sandbox Daily (12.19.2022)
Welcome, Sandbox friends.
Today’s Daily discusses the historical context of S&P 500 bear markets and recessions, reviewing Goldman Sachs stock market outlook for 2023, 10-year inflation breakevens break down, commodity price increases continue off a higher base, and the 2022 FIFA World Cup.
Let’s dig in.
Markets in review
EQUITIES: Dow -0.49% | S&P 500 -0.90% | Russell 2000 -1.41% | Nasdaq 100 -1.42%
FIXED INCOME: Barclays Agg Bond -0.61% | High Yield -0.51% | 2yr UST 4.262% | 10yr UST 3.597%
COMMODITIES: Brent Crude +1.45% to $80.19/barrel. Gold -0.21% to $1,796.5/oz.
BITCOIN: -1.86% to $16,438
US DOLLAR INDEX: -0.02% to 104.681
CBOE EQUITY PUT/CALL RATIO: 1.19
VIX: -0.88% to 22.42
Bear markets and recessions
With so much attention on the worst kept secret in Wall Street (recession in 2023), let’s put some context around the current bear market as a presage to the expectation of economic growth potentially contracting next year.
Do all bear markets take place in a recession? Short answer: no. Stocks can endure a bear market without the economy heading into recession.
Bear markets tend to behave differently depending if the economy is in recession or not. The average bear market outside of a recession averages 7 months in length, the S&P 500 averages a -24% drawdown, and the market recovers in roughly 10 months. The average bear market inside a recession is quite different in that it averages 18 months in length, the S&P 500 averages a -36% drawdown, and the market recovers in roughly 27 months. Quite a contrast!
One final perspective is particularly relevant to the current period, given the uncertain market conditions and the wide range of expectations on what comes next. Looking at all the bear markets that took place around a recession, not once did the bear market end before the recession started. In other words, if we are indeed headed for a recession in 2023, this could suggest that new lows may also be quite likely. Incredibly, bears don’t end for another nine months on average after the recession started, before they find their ultimate low.
As Mark Twain if reputed to say, ”History doesn’t repeat itself but it often rhymes.”
Source: Carson Group (Ryan Detrick)
Goldman Sachs stock market outlook for 2023
Goldman Sachs base case is the S&P 500 index will fall to 3600 in the 1st half before rallying to 4000 by year-end. Their baseline forecast assumes a soft landing (no recession) for the U.S. economy with annual average GDP growth of +1% and interest rates remaining elevated. In this environment, S&P 500 firms will deliver $224 of earnings-per-share (EPS), flat vs. 2022, and the index will end 2023 at 4000, reflecting a 17x multiple on 2024 EPS of $237. See exhibits #1 and #2.
Many investors expect a more bearish outcome. In a recession, GS believes the S&P 500 would decline to 3150. However, even barring recession, earnings could fall next year due to more margin compression than expected. Valuations could also surprise to the downside if taming inflation requires more rate hikes than the market now prices. See exhibit #3.
In terms of upside risks to their forecast, shares would benefit if firms protect margins and grow earnings, but this seems unlikely unless inflation remains high. A dovish Fed pivot would represent a tailwind to P/E multiples but seems unlikely unless growth disappoints materially.
Source: David Kostin, Goldman Sachs Global Investment Research
Breakevens break down
Instead of guessing the future direction of inflation, it’s often helpful to understand where it has been and where it is today. The 10-year breakeven inflation rate peaked in April and has been heading lower since, closing below its prior-cycle highs last week, which coincide with the 2018 peak.
Whether the Fed has fully defeated inflation remains unseen, but the 10-year breakevens are printing their lowest level in nearly two years.
This chart looks eerily similar to crude oil and gasoline futures, as both pro-cyclical commodities have undercut their prior-cycle highs. As long as inflation expectations continue to trend lower, inflationary assets such as commodities could do the same.
Selling pressure continues to pick up as risk assets across the board turn lower. The markets continue to present challenging conditions that demand caution.
Source: All Star Charts
Price increases continue, now off a higher base
The headline Consumer Price Index (CPI) was up +7.1% year-over-year for November. This represented the smallest 12-month increase since the period ending December 2021.
It is expected that year over year inflation will continue to slow over the coming months. However, it is important to note that these increases are off of the higher base established during the first several months of the inflation cycle.
So, while slower inflation is better than faster, the experience for the consumer is not likely to improve. To wit, the three-year change in prices are notable across a variety of categories, including food and energy.
Source: Horizon Kinetics
2022 FIFA World Cup
Argentina outlasted France in yesterday’s World Cup championship needing extra-time and penalty kicks to decide the winner in thrilling fashion, with superstar Argentinian captain Lionel Messi playing in his record 26th and final World Cup match and achieving a fairy-tale ending to his illustrious career.
In the 12 years since the tiny gas-rich country was awarded rights to the event, Qatar spent an estimated $220 billion dollars preparing to host the 2022 FIFA World Cup; Bloomberg estimated the true cost could be as high as $300 billion dollars. Doha has been transformed, with the capital now dotted with new stadiums, hotels, restaurants, underground transportation, and other infrastructure built to accommodate the million+ fans estimated to attend the tournament. The capital investment is part of Qatar’s expansive National Vision 2030 plan to become an “advanced society” and global business hub.
The tournament is the first World Cup to be held in the Middle East, in many ways the culmination of the wider region’s grand ambitions in the world of sports. And it delivered – at least from a financial perspective – with Qatar-based news channel Al Jazeera reporting that the 2022 World Cup will generate a record $7.5 billion dollars for FIFA.
Source: Chartr, ESPN, Bloomberg, Al Jazeera
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.