There was some big news yesterday- inflation data posted at 9.1% above last year’s numbers. These headlines were pretty jarring to people watching the news. However, it did not reassure anyone that Jerome Powell or President Biden had a handle on the economy. I spoke to a colleague at UBS yesterday, and he shed some excellent insights on the market.
Despite the steep 20%+ drop in the market, we are still trading at approximately 16x forward-looking P/E. Historically the S&P trades at around 15x. So what does this tell us? First, we are back on trend, and the market is considered “fairly priced.”
The issue he painted was the “E” in “P/E.” How these big publicly traded execs will guide earnings amid recessionary headwinds will tell us a great deal. I believe most of it will be sandbagging to ensure they hit their numbers, but there goes the way of the world.
My biggest concern right now is twofold:
Russia has positioned itself in a power position in the energy and food supply chain. Going into winter, this can be highly problematic.
We cannot get inflation under control, and interest rates reach 7%. This will cause a momentous shift in asset allocation into fixed income, resulting in a massive shift out of the equities market.
As my colleague said at UBS- “it is a death of a thousand paper cuts.”
