Living On The Edge: Investor Sentiment Feels Like 2008

Living On The Edge: Investor Sentiment Feels Like 2008

Investors are too optimistic. The economy and markets will get worse before they get better.

We climbed high during 2020 and 2021 due to manufactured “stimulus” in the absence of production which could only end in inflation. Given the nose-bleed heights brought on by artificial excess, we have far to fall as markets, asset prices and the economy at large reverts to the mean.

The past several months remind me of the months leading up to the 2008 financial crisis. Despite the fact that an over-leveraged U.S. economy was facing a credit crunch equity investors remained sanguine. 2008 pre-dated the “Fed put”. As the credit crisis ballooned into a full blown global economic downturn, I recall Software companies that went from 20% YOY Revenue growth to flat or down 10% YOY. I recall Services companies that went from 10% YOY Revenue growth to 20% revenue declines. This slowdown lasted from 2008 through most or all of 2010. It was not until calendar year 2011 that the economy and corporate revenues started to rebound and another year or two before Revenue growth normalized.

Today is somewhat different in that the Fed has demonstrated that when things get “bad enough” as they did in April 2020, it is not above allocating trillions of dollars of support to the economy by way subsidizing fiscal stimulus efforts and by allocating capital to companies of all sizes – even those that did not need it such as Apple (AAPL).

Today is also different from 2008 in that we have an elevated CPI in the 8-9% range and elevated PPI in the 11-12% range primarily as a result of the elevated money supply created by the Fed’s excessive money printing to support QE over the past 13 years, to support fiscal stimulus under the Trump and Biden Administrations, and to subsidize the annual fiscal deficits which barely cause anyone to raise an eyebrow. Should we enter a recession (I believe we have), efforts by the Fed to soften the economic blow will only exacerbate the inflation problem.

Inflation has to be tamed in order for the U.S. economy to flourish. You simply can not have prolonged elevated inflation, a debt load ($30 trillion) that exceeds GDP AND robust Real GDP growth. Thus, the U.S. economy will further weaken this year and the markets have more downside risk (9,000 is the NASDAQ level we are looking for).

While the Fed may pause its tightening efforts in the September timeframe, this will not change the fact that inflation needs to be tamed. The market has helped the Fed to a degree as bond yields have generally moved higher over the past year-plus, thereby tightening access to credit. Inflation has both impaired consumer and corporate outlooks which has already negatively impacted profit margins and revenue growth for many companies which translates to layoffs and hiring freezes and creates a vicious cycle.

The takeaway is that there will be no economic “soft landing” and markets will trade lower from here.