thoughts (ix)

all of these “thoughts” posts are laying the groundwork for creating an investment strategy for early 2023.

The stock market, measured by the S&P 500, has entered month 14 of the current bear market; the index (capital changes, i.e., without counting dividends) is down just about 20% over that span. NASDAQ is off about a third.

In terms of the decline so far, this would be a garden-variety bear market. In terms of time, it would need to go on for another three months or so to transition from short to garden-variety.

One can reasonably argue that the economic circumstances of the current bear market have been somewhat worse than garden-variety. Think: pandemic denial (US and China), trade restrictions, coup attempt, war in Ukraine (resulting in higher energy prices, particularly in Europe), collapse of the Chinese property market and (policy induced) implosion of the Chinese tech sector…

One big difference: the government-induced decline of interest rates to the twilight zone level of zero, sparking speculative fever …and, mixing metaphors, a subsequent hangover, as the monetary punchbowl is being withdrawn

Still, Trump’s bizarre policies excepted, for the US these negatives are mostly external shocks rather than domestic business cycle problems. And the Biden administration quickly shifted from pandemic denial to pandemic treatment. Three consequences: the US has been less exposed than elsewhere to the most damaging economic developments; the dollar has strengthened; and foreign safe-haven-driven fixed income flows have countered to some degree the effectiveness of the Fed’s money tightening efforts.

Two important stock market issues:

–the strong consensus view of brokerage firms is that the stock market will be weak during first half of 2023 and will bounce back to some degree in the second. I know of only dissenter. The dictum that the market acts in a way to make the greatest fools out of the largest number of people would suggest that all of the bets on market weakness have already been placed. However,

–Wall Street seems to me to have pivoted sharply away from a strategy of trying to create, and act in advance on, unique research that predicts corporate earnings, toward quick buy/sell reaction when publicly-traded companies’ announce their results. Trading bots instead of research departments. (Yes, to a considerable degree, professional investors become more cautious and reaction-prone–much less willing to pay today for earnings that will come, say, six months or a year in the future–during bear markets, but I think market behavior over the past couple of years has become qualitatively different from taking the customary defensive stance.)

What I conclude from all this tomorrow

Note: earlier today Lululemon (LULU) narrowed the range of expected earnings for 4Q22 (ends 1/31/23) by a tiny amount, citing a margin squeeze during the quarter. To me, it makes sense that new athletic wear would have a low priority at a difficult economic time. Still, the company’s gross margin “squeeze” is a drop from 58% to 57%. The expected earnings, if we take the midpoint of the company’s guidance range, are now $4.245 per share vs a previous $4.25.

As I started writing this, the stock was down by more than 13% in pre-market trading. As I’m finishing, it’s off by about 10%.

Yes, the company has been a star performer in a bad market and the PE is at a very rich 35x. So maybe the company announcement is a trigger for the selloff rather than a cause. But the new information doesn’t appear to me to warrant a 10% drop in the stock price.

Something to watch.

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