We have seen some major moves of market in recent days , At the time of writing this blog , year to date(2022) VIX was 53% while S&P500 was -13% .
So what is going on ? answer is simple Market tend to over-react every rate hike cycle of federal reserve . let’s take an example of recent year 2016-18 rate hike cycle.
After enjoying years of low interest rate when Fed decided to raise rates market didn’t took it well it dropped 13%. followed by relief rally of 10% and again touching the bottom with -15% . This cycle continued for 8 months. You can see that in above chart in grey zone.
During this time market did horizontal move , Similar to what is going on now, Raising only the blood pressure of investors but not the Profit.
So how long will be this horizontal move ?
Answer is not that simple, During year 2016 Oil price was ranging between 40-60 USD while now it is 100+. US inflation was ranging between 2-4% while now it is between 6-8%.
But Not all is bad, if we look at the job numbers it shows economy is still strong and we have record job openings. better then year 2016-18 and almost pre-pandemic levels. Below chart shows unemployment rates. We are now at 3.8% .
what about P/E and Valuation ?
Investors have been dealing with a valuation issue since the middle of 2018. On the one hand, equities valuations (in this piece, we’ll focus on the price-to-earnings ratio) were historically high, while “risk-free” bond yields were historically low.
Now is totally different situation :
Let’s begin with stocks. The decade is a good time frame to use because it encompasses a variety of macroeconomic settings while also allowing for a consistent comparison of the many types of companies that make up the S&P 500. Financials and energy firms, which naturally trade at lower price-to-earnings values due to their more cyclical earnings, comprised up a quarter of the S&P 500 ten years ago. Those two industries now account for only 15% of the economy. The S&P 500 is currently trading at an 18x price-to-earnings ratio, which is exactly the average over that seven-year period. We believe that corporate earnings (which drive stock values over time) will continue to rise steadily. For the first time in a long time, It is cheaper .
So to answer how long it will take to breakout i can give you 2 cases.
case1 😟 : if you think there will be recession in that case you are looking at 2-3 years of horizontal move.
Case 2 😊: if you think we will survive with the minor recession and FED will pull of soft landing in that case S&P500 is ready to breakout in coming months or a year.
my 2 cents are on Case no.2. What ever you choose in long run Market will not disappoint us. so Ride these unpleasant months out with out losing your hair.
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