The 2008 downturn and the current downcycle have similarities as far as investor sentiment is concerned. We believe that investor sentiment will sour early next year as Q4 2022 earnings reports come in. 2023 earnings estimates and stock prices will move lower off of the Q4 EPS reports.
- Early cycle disbelief. I recall that in early 2008 few investors believed a slowdown was looming even though the housing market had peaked in July 2006 and despite the fact that there was a credit crunch in the early part of 2008. This time around investor sentiment was similar in that investors did not want to entertain the thought of a recession despite clear economic warning signs (housing declines, used car price declines, plummeting savings rates and spiking credit card usage not to mention a sharp tightening in monetary policy). During the current cycle investors largely only wanted to hear good news and exercised selective hearing around negative news.
- The downturn will pass quickly (No it won’t). In 2008 the prevailing investor sentiment was that the first half of 2008 would be rough but the economy and corporate earnings would rebound from there. The reality was that 2009 was worse than 2008 for most Technology companies and it was not until the second half of 2010 when companies truly began to recover. I see a similar situation today, only we are falling from far greater heights than in 2008 as it relates to: valuations, spending (corporate and especially consumer), and easy monetary policy (literally the easiest of the last 5,000 years).
- Monetary Policy operates with a lag. We have yet to see most of the economic damage levied by The Fed. For example, the artificially low government-reported unemployment rate may double within the next year or so and triple to around 9% in 2024 if we are not careful (tightening too fast into a slowing economy). We prefer to monitor the labor participation rate and expect that measure to fall over the next two or three years as the unemployment rate climbs higher.
- Not so fast… Our sense is that investors have not adequately priced in the risk of a deep and prolonged recession/depression. Technology valuations have not priced in the risk of a deep and prolonged recession despite the fact that the risk is very real. My sense is that the forthcoming Q4 2022 earnings calls to be held in January and February will be negative both in terms of results and 2023 outlook. If correct, earnings estimates and stock prices are headed toward much lower levels. The NASDAQ could very easily fall from 11,300 to 9,000 next year. We believe NASDAQ 9,000 is the base case scenario for 2023.