Stifel has a fantastic research piece out on are we potentially at the bottom of the market? what is the trend likely going to look like for inflation? And let's look at some charts to see if they can guide us, because right now things look pretty tense. many of you already know, but in case you don't I'll catch you up I Personally think markets bottomed uh, likely around October knock on wood some stocks obviously bottomed around June and I think we're in a Nike Swoosh style recovery where we went down relatively quickly and we're going to have a slow but very volatile sort of grow up. And that's mostly because I believe markets today are going to try to price in the bottom of the market sooner than what the bottom of the market May typically occur. And the reason I Think that is because the Internet has done a very good job of suggesting that the bottom of the market is usually in alignment with when the recession starts.

But if markets know that, then they'll buy before the bottom of when the recession starts. and I think thanks to the Internet, we're actually going to see a slight move up this time around. but that's my opinion. Keep that in mind, catch you up to speed.

Let's now take a peek at This research piece and let's see what they think. So what do we have here? Cecil Equity Strategists suggests the following: They see the S P 500 by mid-2023 at 4 100. right now, the S P 500 is sitting at 3970. Uh, potentially uh, all the way up to 4 300 leading to a midpoint of 4200.

And they believe that stocks actually fell last year in line with a recession. Now this particular chart is fascinating. What they did is they took the S P 500 on an inflation-adjusted basis. Now that's important because obviously we've had very high inflation and they took this on an inflation-adjusted basis.

And uh, they they drew basically your S P 500. So this little black up and down right here. That's the S P 500.. the green line here is the 200-day moving average.

Now, if you go back to World War II and you look at all 13 recession bear markets and you take those on an inflation-adjusted basis, which includes the inflation-adjusted Bear markets of the 1970s. You tend to see that stocks fall on the S P 500 by about 32 percent. and take a look at the intraday low October 13th, 2022. it is about 32 down.

So on an inflation-adjusted basis, you could actually already start to see the formation of the Nike Swoosh. So if I were to draw it with a light blue pencil. Here, you see the down. Uh, let's make that substantially larger so we can actually see it.

There we go. You can see the down and let's do that a little better. here. Let's do something like this.

Let's go there. We go. So we have our Nike swooshed down and then hopefully we have a nice slower recovery that then extends potentially for the rest of the decade with obviously a lot of volatility. That's my expectation and my thesis, and this chart here on the left actually somewhat aligns with that idea.

but let's see what else they have. So first, they give us this breakdown of what the Federal Reserve's projections are. The Fed's projections are right here: That interest rates are going to sit right around 5.1 percent. Uh, at least until about June.

Well, if we look at what the markets were pricing in before the failure of Silicon Valley Bank you can actually see markets were pricing in a lot more of an aggressive Fed much higher as high as 5.5 to 5.8 percent. And that's interesting because Mr Bullard Actually one of the Hawks over at the FED just came out and suggested that the terminal rate should be 5.625 percent now. I Think that's interesting coming from a hawk because that's actually Dovish. now.

You might think that's wild. But get this for a moment. just last year: Mr Bullard suggested. hey, interest rates might end up being between five and seven percent.

All right. Well, between five and seven percent implies a midpoint of six percent right. And where folks is 5.625 percent right? Here it's on the left side. it's a left tail.

It is Dovish. That's fascinating to consider that one of the Hawks at the FED even though he's talking about a being bearish and hawkish and suggesting we need to do even more than what we've already done. What does he suggest Less Hawk then previously assumed. It's interesting.

But what's also interesting is the separation between what the market is now pricing in for the end of the year Uh, at the end of 2023, we're pricing in almost 100 basis points of cuts and so you could see how the market how volatile the market is. This is where the FED is. This is where the market was. This is where the market is now.

It's a huge difference. Let's keep going. This right here is uh, sort of a question about what What do we think The Bear Case is here, right? What? What? What is the long-term Trend If we try to take out some of the insaneness of the last few years, we'll take a look at this chart. This chart here suggests that over time since 1976, we have experienced a reduction.

a substantial reduction in the real rate of interest. or should I say, the neutral rate. The neutral rate has slowly trended down. Here's the midpoint: the black dotted line in the middle Uh.

one standard deviation up the red, one standard deviation down though at Green and what we could see is a A really A a picture of Uh somewhere around 90s What? 90 something percent Uh of uh Well, this is Uh, there's two standard deviations. Here's the the bulk of results occur: Uh Within These bands and you could see that the trend is lower interest rates over time. Now, Yes, inflation has gone up and real yields have risen. You could see that here on the right, but they're actually not outside or or really far outside.

I Mean we've popped over a little bit here here. here here, they're really not outside. far outside the long-term Trend And so potentially you were just going to see a reversion to zero percent rates. and we're actually going to be right back to Zerp: Zero interest? Um, uh, Zero zero percent interest rates.

But anyway, this idea that we're gonna have high inflation for a long period of time and high rates for a long period of time really stands in the face of what has been happening over the last 45 years. This chart shows you rates over the last 45 years. Yes, they are volatile, but look at how they even absorb the inflation that occurred not only in the mid 90s which was more nominal, but the inflation that occurred in the, uh, the late 70s. They do leave a little note here.

They say unwinding 23 years. It's even more than this when we go all the way back in the chart. But anyway, unwinding 23 years of low, real yields is a heavy lift which would crush the financial system. So scary.

Warning here. Now here they talk about the contribution of how CPI is made up. Now this is a neat chart because at first if you look at Core services with shelter here the green you can see the green is expanding. And that's really scary that the green is expanding right because Jerome Powell says hike until Services go down.

But if you actually look at Core Services minus inflation, you can see there's already been an inflection point. Core Services minus Inflation has already started to decline, which is fantastic. The only thing that's propping up Core Services right now is housing. However, we expect that housing will plummet and when this section here goes negative, which it will sometime this year, what's left of CPI will be very, very nominal.

So we're excited to see uh, that progress happen. It hasn't happened quite yet and here you can see Core Services Excluding inflation we have inflected and the trend is down. It's just a matter now of how long it takes, but it does seem like we have hit peak. In fact, take a look at this in uh, in the green line.

Here we see pre-1980 high inflation versus the Blue Line low inflation post 1980 for what they call inflation Cycles And they line up Peak to low and they tell you roughly how long it's going to take to get inflation down and what do we see here? Well, we see we're at the red line right here and we might be in about at the level of about eight months of inflation declines. Right now, we might have another 10 months to go, which really puts us at about January 2024 for being back to. potentially. if this sort of trend holds, uh, some four percent inflation and uh, and and hopefully back to that longer term Trend soon, that'll be very exciting to get inflation down.

I Can't wait to read inflation reports and actually see them go negative. Someone here asks what's your take on market conditions if we head into a deflationary Time uh, which looks to be the case? Well, I think deflation rewards, uh. technology. In fact, there's a chart here I'll jump to it for you.

Look at that. I'm jumping ahead. Three or four slides just for you and I appreciate y'all Seriously, thank you by the way for coming and joining this early on a Saturday morning. You have to be insane to be up this early and therefore I appreciate you because I too am insane.

We are the same All right. What do we got over here? So they tell you here In a disinflationary boom, which is when you have strong economic growth and low inflation. What actually does well are media, entertainment, software Services semiconductors Tech Retailing and autos Tesla Nvidia TSM Cloudflare crowdstrike Salesforce right? Our favorites: A favorite: Innovation Strategies do very, very well in a disinflationary boom. Problem is: you don't want to be in a situation where you're here.

that's stagflation, which is where you have weak economic growth and high inflation. Now they suggest in these environments, consumer services Health Care household and personal products basically Staples do well. I Actually think that the fear of stagflation is exactly why food like McDonald's or Staples or Costco or whatever did so well over the last year. But I don't think that is going to last I Think we are going to see a transition from stagflation, two disinflation, and a boom.

especially when we start turning the money printer on again. Uh, so a good good question. Thank you for that. Uh, let's see which other charts were important.

Okay, here we go. History suggests the S P 500 is in a broad trading range until a recession is more clear. Now, this is interesting because as we've said, the stock market usually doesn't bottom until shortly after a recession begins. Unfortunately, we don't know when we're in a recession until sometimes six to 18 months after the recession has actually started.

It's sort of hindsight analysis. It's It's very frustrating how delayed recessionary estimates are, but this idea that stocks potentially have another 10 to 15 percent to fall is Uh, is concerning, Should be concerning for long-term investors, because you really suggest that. Well, the recession should begin here in month two, in month three and a half. Now, is it possible that we could go back and revise? Uh Q4 and suggest we were in a recession in Q4 see stocks dropped.

Yeah. I mean technically it is. Technically we could have been considered to be in a recession in Q4 but it's unlikely with how unemployment was uh and uh and and how much growth we still had, so it's unlikely. But uh, it's also possible that we try to front run this.

Let's make it an example here. Let's say we think that the recession will start Q3 That's what a lot of folks think. So let's say June June 23. that would put the bottom of the market probably in historical context around August to another two months later.

So October so that would say bottom is Aug October Well, if markets are so convinced of this today, is it not possible that this time around, Uh, markets could pre-price in some of that pain? Sure, it's possible, but does that mean it would be possible all the way back to October of 2022? Who knows. And so it all depends on where that recession starts. But the problem is because we don't know when the official definition of recession starts. When that time comes.

Could be this quarter for goodness sakes. Uh, who knows. Since we don't know when this comes, it's very difficult to look at this chart and suggest any kind of action It it doesn't seem like the right thing to do it. In fact, right now it seems almost as if the right thing to do is nothing but look at what's doing.

actually. well right now in 2023, it's the disinflationary boom Stocks Those have done very well so far in 2023 and uh, Financial conditions are actually a pretty big deal. Uh Financial conditions are made up by a lot of different things and those are going to be uh, something the FED takes a peek at deeply. But here are what Financial conditions look like.

They take your your tip, seals your breakevens your dollar ratios on on the stock market. and uh, we could see that in recessions you usually get a spike in the 10-year treasury Ultra secure and B Double A bonds which are less secure. B Double A is is you know less, uh, less than obviously your your A ratings Uh, like your let's say your AAA Bond uh, B Double A is is usually the lowest form of investment grade debt. Uh, this is usually a Moody's definition and it puts you around a medium risk.

So it's not like a high risk junk bond. But usually what you see is you see medium risk bonds become very expensive offensive as a leading indicator to recessions. and potentially that exactly is what we're starting to see right here happening again. But I think it's a foregone conclusion Honestly, that we're going to go into recession.

Uh, in other words, in English I I think we expect to go into a recession at this point. Now personally, I find all of this very reiterating and mostly I Think this is reiterating because the decline in CPI that we're forecasting is going to make a massive or lead to a massive drop in in our CPI reads. specifically looking at how much of that core Services segment including housing is made up of by housing. as you can see, the inflection point is already in core.

Services X Shelter That's fantastic if you could get the green to go negative which is likely within the next six months. Fantastic Is it also possible that we already had our inflation-adjusted stock market decline just like history suggests, while at the same time, we have no idea when that recession technically starts. In my opinion, this set from stifle here makes me more bullish on this particular strategy, which is a strategy that so far this year has been outperforming. But it's a strategy on the right side which is planning for the disinflationary boom over the next 10 years now.

Is it possible we have a lot of volatility? Absolutely absolutely do. I Think we'll end up with stagflation? Unlikely because stagflation suggests we will end up with such high inflation for so long that uh, that that the economy essentially gets pushed into a deep recession. Now that's possible depending on credit spreads or or credit tightening. But I think it's unlikely And so I'm putting my money where my mouth is.

Obviously, if you think inflation is likely to stay high, you probably want to be in some of the lower section sections where if you think we have enough money to keep a strong economy going which I do as well, but you think inflation is going to stay high, well, that's where you'd probably want to be in energy and materials personally. I wouldn't want to be in the banks, but the beautiful thing is a you could do whatever you want and B I don't care what choice you make, it doesn't make a difference to me. so I would. Actually, if I were you I'd probably take a screenshot of this chart right here I suppose I I should add uh, you know, but make sure to get the coupon code right.

we should. We should add that there you go. Now you can take a screenshot, don't rewind and take a screenshot without that there. That's that's very important.