VP April 2023 Market Outlook & Discussion
Recorded on April 6th for VP clients
Key themes:
US vs China de-syncing is now obvious in our models. Our China recession model has collapsed to zero.
Our US recession model keeps ticking higher as hard data stress becomes more apparent. Labor market stress is increasing. Initial claims has been suppressed by seasonal factors, but should still increase with the surge in WARN notices and Challenger layoffs.
The Fed is handcuffed by data distortions, despite recession risks. The Fed cut late into the 1969-70 recession with inflation still elevated, equities still suffered after the first cut as recession stress became obvious.
On a cyclical 6-month horizon, we remain risk-off (overweight bonds, overweight gold, underweight equities). We flagged a tactical sell on bonds and tactical buy on small caps/financials on 20th March after turning tactically bearish on Feb 7th.
We acknowledge consensus bearish equity views and some signs of capitulation. We prioritize the message from our US recession model and await signs of genuine policymaker panic (which would complete our market bottoms checklist).
US large-caps are most vulnerable to a recession re-pricing. The distribution of forward P/E multiples across the S&P 500 companies looks very different to 2009 and 2020 bottoms. The distribution of international equity valuations are more consistent with a market bottom. Many international companies are trading on single-digit multiples.
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