Investors,
We’ve officially entered the 4th quarter of 2022, in what will likely go down as one of the most remarkable years for U.S. financial markets ever. Unfortunately, not for good reason. With the three largest stock market indexes closing at new daily, weekly and monthly lows and Treasuries continuing to bleed lower, financial markets are in pure mayhem.
The begrudging length of this bear market trend has punished investor enthusiasm, particularly as investors stay on alert for a weaker labor market and a formal recession. While the U.S. has experienced two consecutive quarters of negative real GDP growth, incomes are growing at a substantial pace, retail sales & spending trends have remained resilient, and demand for labor still appears strong. While these pockets of resilience can deteriorate over the coming months, there is minimal evidence of weakness currently.
Recent market direction has little to do with fundamental valuations and has everything to do with macro dynamics. I’ve shared multiple new & exclusive studies over the past several months, highlighting the extreme nature of the selloff and historic bullish signals that have occurred thus far. While I continue to remain confident in the long-term takeaways from those studies, I expressed that statistics don’t operate in a vacuum and that the macro developments could invalidate these studies in the short-term. Regardless of the bullish statistics, it’s vital to recognize the uphill battle caused by a monetary tightening cycle:
Immediately after posting this Tweet on 6/17/2022, the stock market experienced a massive rally through mid-August. The Nasdaq-100 gained +22.8% during that time, in which macro analysts & Fed watchers were being ridiculed because they had advised against speculative behavior. Since the intra-day peak on 8/16, the Nasdaq-100 has fallen -19.97% and officially reached new YTD lows.
At the end of the day, the analysts advocating for caution & prudence were correct, reaffirming my confidence in the set of rules expressed above. For example, consider Rule #2: Don’t try to identify tops/bottoms. Anyone who shouted “the lows are in!” over the past three months has now been proven to be incorrect. Props to them for stating their opinion & standing by it, but they indirectly encouraged speculation & put investors in a difficult position.
In the remainder of this analysis, I’ll focus primarily on real estate stocks and what it could imply for the broader real estate market. In addition, I’ll provide an updated view of the S&P 500’s under-hood-metrics so that we can get a deeper understanding for the underlying behavior of the market.