Don’t Fight the FED
This is, far and large, the best bargain-hunter stock market environment in many years. I might even say these are the best conditions in over 26 years, ever since the rate hikes of the mid-1990s!
For the first time in my adult life, the FED is not my friend or the buyer of last resort.
The world has certainly changed when it comes to U.S. equities because the Federal Reserve’s measure of success is no longer the performance of equities but their ability to avoid slowing the economy down to a screeching halt while they tame inflationary pressures.
Forget the Plunge Protection Team and monetary U-turns… the FED is tackling a major problem in a new monetary, fiscal, and economic environment, and their playbook has evolved.
Think about supply chains and “Just In Time” delivery. This has collapsed, and we believe that companies are going to adapt to new shipping, logistics, and transportation realities. It’s already taking place and shaping right in front of our eyes.
The bottom line is that buying the dip with the expectation that P/E ratios are cyclically multiplying and appreciating is the wrong move.
The total return of a stock market equity is comprised of dividend payments (if there are any), EPS growth (which are the organic improvements of a business that are, in theory, going to lead to bigger market caps), and P/E ratio expansion, which occurs when competing asset classes don’t offer much return so investors are willing to pay more and “chase” lower returns.
While interest rates were zero-bound in the past decade, P/E ratios ballooned, and that drove returns since new buyers were willing to pay more, but the rate shock that’s underway is changing all of that.
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This is largely why EPS growth and dividend payments now take precedent along with “growth companies,” which are not yet profitable and can’t pay dividends or report earnings because they are “sacrificing” profit efficiencies and putting revenues back into developing new products and gaining market share from established competitors.
For the foreseeable future, this measure of success, that of increasing revenues, new product penetration, customer loyalty, and other metrics for a growing business will NOT BE appreciated and translated into higher market caps.
It’s as if these catalysts for value creation are nonexistent.
This will only change when the FED announces victory over inflation.
For now, Wall Street analysts are calling for a recession, a more aggressive Federal Reserve, a bear market in 2022, and GDP contraction.
Future Money Trends sees this as one of the most pivotal changes to markets since 1995, and it makes sense that alternatives that are profitable and enjoying booms, like mining stocks, will SOAR.
My point is that even when you see sentiment at extremely bearish readings, it doesn’t mean that the markets will snap back higher unless companies are actually more profitable and efficient.
The premium is gone that investors were willing to pay in the past decade while inflation was muted, didn’t erode future gains, and the FED was pro-equities.
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