After pondering the market's state this weekend, my conclusion is that the "sell first and revisit later thesis" is not dead in the water just yet. Even if the propensity to panic sell has temporarily subsided, investors are worried about being rocked again. In many respects, investors' psyches were damaged a week ago. To repairit would require a whole bunch of sequences to develop that don't appear probable in the short term.
The Market's Unattractive Attributes
Problems down every alley:
Two items that will begin to be heard more and more are "grand bargain" and "down payment," both in reference to addressing the fiscal cliff. The market is badly in search of soothing comments on either event. This is increasingly evident in stocks that are trading on comments from politicians than any new macro/micro information. As for a down payment reached via backroom wheeling and dealing that will create to a grand bargain in 2013, that's an issue for investors as it may not prevent a credit rating downgrade and leaves the cliff debate to fester. As for a grand bargain, remember that it's tantamount to an austerity program that will weigh on growth. So, the way I see it, the market remains prone to an uneven risk-reward ratio as it attempts to price in events on a major issue that are really not too rosy when all is said and done.
The basic multiple floating around is that a 1% reduction in government spending equals a 1% reduction in economic output. Possible infrastructure stimulus could blunt the impact, but the paying back of government and private sector sins is a large unknown in that it has not happened in a while. Hence, I think we have to find a new definition of what constitutes "attractive valuation."
Modest Blemishes in the Here and Now
- Retail sales for October are projected to have grown below September's jolt. This is the likely lose/lose scenario: A slightly above consensus core is disregarded as it came before Hurricane Sandy, and it will signal month-on-month slowing preholiday. Sentiment prevails that consumer spending for the holidays is at risk compared to what's priced into stocks as the effects of Hurricane Sandy take their toll, with fiscal cliff not helping matters.
- I expect to hear deflation used this week in circles. I am specifically looking at the Empire State and Philly Fed employment components, which have been weak, staying soft. The market will hold the notion of minimal economic momentum prior to fiscal cliff and consider selling more, or so I fancy. Toss in the consumer price index reading as a support point for the bumbling economy leads to minimal pricing power view.
The present valuation of forwarded earnings estimates is of 12.8x. In light of the fundamental issues we are contending with, it seems reasonable to expect additional multiple contraction and earnings estimate adjustments. That's a double whammy that requires time and patience on the part of investors who don't want to lose their shirts trying to predict the bottom.