US Consumer Sentiment recovered to 66.4 in February according to the University of Michigan survey. Before we get a little too excited about this data print like everyone else, it still remains at historic crisis levels.
Also sentiment seems to be primarily driven by the price of gasoline at the bowser these days, and that could be on the way back up?
In a way, the market is being caught wrong footed by the idea that the US economy is faring better than it actually is. Which is causing some in the investment community to realise that rates are going a lot higher as inflation remains extremely elevated.
There seems to be a form of panic around the idea that the Fed Funds terminal rate could be much higher than people expected.
We have never changed our view. The Fed will likely stop hiking rates at between 5.75% and 6.5%. There is even risk to 7.5% should inflation for some reason begin rising again.
These forecasts have seemed out of this world to many, but we are already on our way there.
As previously stated, market sentiment completely missed this boat, and that is why stock prices are vulnerable. Stocks are most definitely overvalued relative to what earnings will look like over the coming 1-3 years.
The current elevated stock price levels reflect some kind of mistaken belief in a Nirvana economic recovery, and the fantasy story of a Fed pivot. This is not the reality at all which confronts us over 2023, and perhaps all the way through 2024 as well.
The market will eventually be pricing such a reality and worse. Markets always overshoot. Prices have to swing from false Nirvana hopes to sustain below trend, even negative, growth for 1-3 years. Which will be accompanied by stubborn inflation and a continuing hawkish Federal Reserve.
We should not delude ourselves as to how sustained and significant, the now already commenced downswing in equity valuations will be.
This will not be a short-lived aberration. There is much structurally and geopolitically wrong with the world and the US economy, that markets have previously glimpsed, but must now begin to more fully price in.
A general risk-off period is now likely to pervade for some time.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
