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Why the S&P 500 has over 20% more downside


  • Michael Lebowitz sees a recession coming in 2023.
  • He told Insider on Friday that likely means more than 20% more downside for stocks.
  • The S&P 500 ended 2022 down 20%.

Michael Lebowitz thinks the federal funds rate will be around 2% at the end of 2023, down significantly from the Federal Reserve’s forecast terminal rate of 5.1%.

Such a dramatic pivot to more accommodative policy may look attractive to investors. But what may cause this reversal is what keeps Lebowitz – a portfolio manager at RIA Advisors who began his career in 1990 trading mortgages at Freddie Mac – up at night.

There is a low probability that inflation will quickly come down to the Fed’s 2% target, allowing the Fed to pull back. But Lebowitz thinks there is a much higher chance of a recession occurring, forcing the Fed to back down.

Indicators that tell him a slowdown is likely to come include the Chicago Purchasing Managers Index, which is in recessionary territory, and a survey of the Philadelphia Fed’s economic forecasters that shows the likelihood of a recession. the highest for more than 50 years.

And then there’s the inverted yield curve, which has preceded every recession since the 1960s. This occurs when yields on 3-month treasuries are higher than those on 10-year treasuries. Right now, the curve is the most inverted since at least the 1980s.

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When the yield curve has inverted, Lebowitz said in a recent commentary, it’s usually followed by a fast and furious reversal due to the economic crisis. Essentially, reversals and their reversals are generally V-shaped, he said. That’s why he thinks there’s a good chance the Fed will adopt a more dovish policy this year.

That reversal has yet to happen in this reversal, and that’s bad news for stocks, he said. During most reversals, stocks only bottomed out after the yield curve inversions bottomed out. Stock market declines are shown below in light blue shading.

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It’s also not a good environment for equities, as yield curve inversions have typically led to large earnings downgrades, which has yet to happen.

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Another look at history, Lebowitz said, shows that a recession must already be underway before stocks can hit bottom.

RIA Advisors

Ultimately, Lebowitz said the most likely scenario for the S&P 500 is another 20-25% drop to around 2,800-3,000. The index currently sits near 3,895.

“Bear markets don’t stop until recessions start. The yield curve, the Chicago PMI and other analyzes argue that it’s a matter of when, but if a recession happens. On the Based on what we’ve shared, those who claim the market has already bottomed have more hope this time is different,” Lebowitz said in the commentary.

“The financial foghorn is blowing,” he continued. “Historical ratings strongly favor a recession, a stock market decline and a much lower fed funds rate.”

The bigger picture

Lebowitz’s call for a bottom around 2,800-3,000 is relatively in line with the aims of some Wall Street strategists.

Morgan Stanley’s chief U.S. equity strategist, Mike Wilson, sees shares falling to around 3,000-3,300 amid a major earnings downgrade. Savita Subramanian, head of U.S. equities, quantitative and ESG strategy at Bank of America, believes the market could hit a low of 3,000 as a recession hits in 2023. And Goldman’s chief U.S. equity strategist Sachs, David Kostin, said the index could fall to 3,150 in the event of a recession. arrived.

But economists at Goldman Sachs and others are not calling for a recession as a base case scenario. Even Cam Harvey, who discovered the accuracy of the inverted yield curve as a recession indicator, said he believed the indicator (at least based on nominal interest rates) would provide a false positive this time and that the United States would avoid a recession.

One of the reasons Harvey thinks it’s because the job openings – around 10 million right now – are too high. This means that people who lose their jobs can find another one more easily, which keeps unemployment low and supports consumer spending, as opposed to a situation where jobs are more scarce. Another reason is that businesses and consumers seem to be anticipating a recession, which means they are creating a buffer against economic hardship.

But Harvey said if the Fed kept raising rates to slow inflation, it would eventually hit a breaking point and trigger a recession.

Today, the economy appears to remain intact. The Bureau of Labor Statistics said on Friday that the US economy added 223,000 jobs in December, more than economists had expected, and the unemployment rate fell from 3.7% to 3.5%. The S&P 500 climbed more than 2.2% on hopes that a soft landing scenario, where the US economy avoids a recession and inflation falls to more tolerable levels, is still possible. Inflation is still above 7%.

But as history shows, the higher the Fed rises, the higher the risk of an economic downturn becomes. And as Lebowitz pointed out in a phone call with Insider on Friday, rate hikes work with a lag of several months to a year. This means that the worst effects of this tightening diet have probably not yet been seen.



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