the next couple of months

It seems to me the go-to view on Wall Street right now is that:

–peak pandemic-driven earnings came in the first half of last year

–therefore yoy earnings comparisons between now and the summer will be negative–probably by the largest amount in the current economic cycle, and

–as this occurs, stocks will go down one final time, to (hopefully) end the bear market

–during 2H23, earnings comparisons will begin to recover, driving stocks back up to where they started the year.

I have several thoughts:

–yes, during bear markets investors play their cards very close to the chest. They react to current (which is presumably going to be bad) news much more strongly than to the promise of better days in the second half and beyond. I think trading bots accentuate this tendency

–on the other hand, we’re in month 15 of the bear market and the forward PE on the S&P 500 (according to Ed Yardeni) has contracted from 22x to 18x for large cap, 14.5x for mid cap and 13.8x for small cap. In other words, a lot of time has passed and it seems to me a lot of bad news has already been factored into prices, especially for non-behemoths. As is typical of bear markets, though, there’s much more conceptual discussion focused on earnings progression than attention paid to valuation

–while timing the market makes for interesting conversation, it seems to me that the cliche we should be hanging onto is that every new cycle brings a change in market leadership. Back to the behemoths: if we consider the FAANGs (MAANGs?), they’ve been growing strongly for much, much longer than the five years or so the typical growth stock remains in the spotlight. That’s because they’ve progressively reinvented themselves. META, at least, seems to me to have run out of good new ideas, however–and investors have a better realization of how toxic the company’s products can be and how radically dependent they are on what Mark Zuckerberg wants to do.

In any event, I think it’s a more important issue for us to figure out which of the largest and best-known names, if any, we want to be holding when a new bull market begins. I think this is a potentially wiser use of time than trying to call the bottom …and take the all-or-nothing risk of selling with the intention of rebuying a lower prices

–some bear markets end with a whimper. The best preparation for a final selloff, if one occurs, seems to me to be to try to imagine how we’d upgrade the portfolio if one occurs. This might even be the inspiration for doing some housecleaning today.

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