Terrible Backdrop for Stocks

This is just a terrible environment for stocks.  Its not just Powell with his appetite for destruction as he acts tough and gets egged on by financial media to be like Volcker on inflation.  While this is going on, you have an economy that is in a weak position to deal with all these rate hikes as the fiscal impulse is in contraction with nominal M2 money supply flat for the last 6 months, basically unheard of in the modern, post gold reserve era.  Add on top of that the negative wealth effects from stock and bond weakness, as well as much higher rents and food/energy/services costs and you have a consumer that is going to reduce consumption.  That will eventually feed into weaker manufacturing and services, and the inflation rate will go down with a lag of a few months.  

Stock valuations are based off of earnings and the multiple on those earnings.  Earnings are estimated based on the macro conditions.  The multiple depends on financial conditions, mostly the rate at which corporations can borrow.  These are the highest rates for borrowing for corporations looking to issue 5,10,20,30 year bonds since 2010.  Back then, the S&P was trading between 1000-1260.  Its basically 4 times that level now.  No, earnings haven't gone up 4 times.  The forward P/E ratio, which was estimated based off of post recessionary levels, were still just 12 times earnings.  Now, estimates based off of post fiscal boom levels, are trading at 16.8 times earnings.  Somewhat similar interest rate levels, except for short term rates being much higher now than back then, when it was hovering around 0. 

I can't think of a much worse time to be a stock investor after the biggest financial bubble in history just popped, and you still have valuations that are quite elevated with central banks trying to hammer the market anytime it rallies.  

If there is one thing to be learned this year, is that the longer time frame moves are based on macro fundamentals and liquidity, while short term moves are based a lot on positioning, either a wave of stop losses on the selloffs, or big time short covering on the rallies.  We had the short covering rally from mid June to mid August, now its back to the primary trend, which is down.  And I don't see why that trend would end, with the Fed hell bent on hiking to 3.5-4%, and then staying there for a while.  Sure, they'll eventually pivot to the dovish side, but after how much carnage? If there isn't much of a selloff, the Fed will just keep hiking until something breaks, or when the very lagged inflation numbers come down in the middle of 2023, as base effects bring it down sharply. 

I mentioned before that I preferred playing the coming weakness by going long bonds rather than shorting stocks, and that's true from a longer term view, in the short term, its probably better to just short stocks because the market has no appetite for taking on duration risk, and that's probably going to stay that way until the US economic numbers get much worse.  That could take 2-3 months.  In the meantime, stocks could keep getting hammered while bonds go nowhere, stuck between hawkish central banks talking tough and economic data that is weakening, but not falling apart enough to get them to pivot or talk more "gently".  

This market is really out to get counter trend traders.  Straight up and then straight down.  If you are trying to short tops and buy bottoms, its tough out there.  I am hoping for a 1-2 day relief bounce/short squeeze to give a good short entry but its not looking like its happening anytime soon.  And tough to just short the weakness, although it does seem so weak, almost as if the options data showing very little hedging over the past several weeks is coming to haunt the long only managers. Just watching, and waiting for a fat pitch.