Amlin

-- Thoughts on this stock market cycle -- This stock market cycle has been super tricky due to the pandemic, trillions of dollars of fiscal stimulus and "helicopter money" sent to households - all of which have had a major impact on both the economy and asset prices. ZIRP, unprecedented QE, Fed's dovish comments and "helicopter money" created an epic asset bubble in 2021 which popped later that year. This was to be expected. Then, as the Fed ramped up interest-rates in 2022 and embarked on QT, stocks declined sharply with the most speculative names hit the hardest - this was also to be expected. Now we get to the tricky bits - In autumn 2022, the Bank of England's response to the gilt market crisis injected liquidity into the system and this coincided with the start of best 6-month period of the US Presidential Cycle (October 2022-April 2023). Back then, the US inflation rate started trending in the right direction, the economy remained strong and seasonality became a strong tailwind for equities. To complicate the post-bubble contraction further, around the same time, ChatGPT went viral and optimism towards AI + LLMs reignited animal spirits. Based on the above factors, $NDX bottomed late last year and the mega-cap tech stocks "Magnificent 7" took off. The Fed's liquidity injections earlier this year (in response to the regional banking crisis) further fuelled the rally and during the best 6-month period of the US Presidential Cycle (October 2022-April 2023), AI related stocks went parabolic. It is worth noting that during this period, most stocks did not rally hard and this is *not* consistent with the start of a new bull-market. During H1 2023, the US debt ceiling standoff also helped the liquidity picture and pushed up equities as the drawdown in the Treasury General Account helped offset the Fed's balance-sheet reduction. By mid-year, the debt ceiling agreement was reached and the US Treasury's issuance of vast quantities of new supply hit the market and started sucking liquidity from the system. At the beginning of August, Fitch downgraded US government debt, which pushed bond yields higher and further exacerbated the sell-off in US Treasuries. So, we are now in a situation where the bond market has already largely adjusted but the stock market (at least at the index level) is still elevated. Make no mistake, most stocks have already suffered somewhat - just look at $ARKK $IWM $IWO $SPXEW retailers, utilities etc - they are all flat to down YTD and some are at 52-week lows - but the "Magnificent 7" are still holding up $COMPQ $NDX $SPX for now. In the investment business, nothing is set in stone but history shows that whenever the market's breadth gets extremely weak, the last men standing also get shot and bring down the major indices. On the economic front, various leading indicators which have been very reliable for decades are suggesting that a hard landing is knocking on the door and the ugly part of the credit cycle lies ahead. According to my work, a severe recession in '24 is the probable outcome and if this plays out, the upside in stocks is fairly limited. Stocks are currently oversold so at some point in Q4, we are likely to see a relief rally but if decades of history is any guide, the next major move in stocks will be to the downside. This is due to the fact that valuations are still very rich given the risk free rate and Wall Street is still positioned for 12% EPS growth next year. During recessions, earnings decline sharply and multiples also contract which is why there is a real risk of a major sell-off in stocks over the next 9-12 months. IMHO, the business/credit cycle isn't dead - it has just been elongated due to post-COVID stimulus and once the "excess savings" are gone, US consumers will have to deal with very high interest rates, record credit card debt and a low personal savings rate and we are also likely to see a wave of corporate defaults. The chickens are coming home to roost and the next 9-12 months are likely to be tricky for the economy and the stock market. Unlike the recent stock market cycles post the TMT bust (which unfolded in a disinflationary era), in this cycle, because of elevated inflation and reputational risk, the Fed will likely stay on hold for far too long and it'll ease reluctantly; and this raises the risk that the coming economic and stock market downturns might be quite severe. The yield on the 1-Year T-Bill is currently 5.41% and this seems like a decent option given the storm clouds on the horizon.