The biggest event coming up for the coming week is clearly the Fed meeting, what is your expectation?
Looking good for a 75 basis point hike, the third in a row. The market is a bit hesitant that it will be 100 basis points, but there is a slim probability, a 1/4 percent probability of 100 basis points. The key part of this Fed meeting will be that the dot plot will be re-released after June. We get the new scatter plot that gives us an idea of the final rate. Right now the market is discounting about 4.25% as the ending rate for this Fed tightening cycle so let’s see what the FOMC members come up with.
The second part will be their attitude towards growth and inflation. Lately we’ve had a lot of brokers and the World Bank and IMF all voicing doubts about a global recession. We had the CEO of FedEx come online yesterday and talked about the shipment disruption and the looming global recession, so take note. But I fear that this time around they’ll be terrified of doing the Arthur Burns or Wheeler way of the 1970s Fed and they’ll be more like a Volcker to see through rate hikes and break the back of inflation . I think that will be the Fed’s key message.
One good thing is that the market is going into the session very weak, so we don’t expect a big sell-off, in fact there might be a slight rally based on that, but overall the situation is getting worse. The S&P 500’s third-quarter earnings are down, earnings are down sharply, where the July 1 street estimate showed 11% year-over-year growth, it’s down to 5.8%. So earnings estimates are falling, valuations have fallen and we expect markets to continue falling.
Indian markets haven’t gone anywhere, I just looked up the Sept 16 number and it was around 17,629 on Sept 16, 2021. We closed below today, let’s see the adjusted close, but I don’t think we’re going to be higher than that. So our index has clearly not returned for a year, of course there are pockets, there are sectors, there are individuals Stocks that have performed very well, but overall we’ve managed to just stay flat.
In India we are seeing the markets outperforming the global markets but I remember you were expecting the Indian markets to bottom out maybe in September and October. Do you still hold that view?
Yeah, I was hoping you’d forgotten that because Kunal and I were arguing about it. He said there will be a new lifetime high first. I remembered that and said to follow Nooresh and Kunal now and stop talking, but the situation is clearly bad.
I see an earnings recession looming and there is no easy way out and the kind of rate hikes that we have seen along with quantitative tightening, the European Union is incapable of quantitative tightening. But the US is taking out some money, they haven’t been able to hit their targets because that would really just flatten the markets, but I don’t think we’re over the hill. The good is threefold – one in this midterm election year. On average, you have the worst year for the markets going into October, and October through October is the best year of the four-year cycle, so that’s a good thing.
Second, a Fed rate hike leads to a recession only 60% of the time, typically from the start of a Fed rate hike in the 30th month the recession hits. So by that logic, on average, a recession could be expected in 2024, not next year, which is good news. So let’s see if these averages work or this time is one of the markets where we have also had a recession in the past within 11 months of a Fed rate hike.
Cycles like this exist but on average they usually last 30 months so let’s see how this works but I think with two or three assumptions we need to understand what the market is still complacent about.
First, this interest rate cycle won’t end very soon, they will make sure they are on a path to lower inflation. Second when you plant this in the
If you look at the unemployment vs. inflation curve, you’ve got to lose about 5-6 million more jobs in the US, you’ve got to see the unemployment rate go from 3.7% now to about 6.7%, so one Lots of pain ahead if they really are going to tackle the inflation number. If they don’t, if they increase their target to 3%, 3.5% that will be a positive surprise, otherwise just put your helmet on and be prepared for lower markets at least for a few months.
How should one position oneself before earnings when it comes to the IT package?
I think it’s going to stay away given the amount of under ownership that’s coming in and the performance. I think there will still be a lot of pressure on margins. Attrition issues could be resolved to some extent as some layoffs are now happening in the rest of the industry so hopefully IT will see some of the attrition issues go away but margins will be under pressure.
As you said, management’s commentary is mostly upbeat, but the market is looking beyond that. So I would say that we might give IT a break for three months, no new investments in IT, let’s pay attention to the management guidelines and then how the European winter is going, what is happening in the European industry, which will be critical . I don’t expect a US recession at least this year so those numbers should be fine, but what will the cuts be? We are also seeing a slowdown in earnings in the US. All of this will affect our IT, and I treat most of these sell-side reports as lagging indicators. Now that all the major foreign brokerage houses have announced a sale on IT it might be a good time to start but I would wait for the results because there is too much unknown at the moment wait and watch and then we can get together look at that maybe after three months.