Analyst Opinions

Bridgewater about inflationary markets bottom

They analyzed every Inflationary bear market In US, they argue we still have not met any of the 4 conditions that are typical in the bottom:

1. The FED is still tightening. Bottoms happened after the FED cuts rates. "It takes a long enough period and significant enough mount of easing to really offset economic weakness and bring about an upturn. Most significant drawdowns in US history have occurred after the Fed shifts to lowering rates." I have heard this argument before, stocks bottoms always happen after the FED have cut rates several times, the bond market had a big rally and the yield curve resteepens . Giving the push to valuations needed to initiate a new bull market . Today neither have happened.
2. Expected returns remains relatively low compared to history. Quoting "Troughs occur when there has been a material re-rating in equity pricing such that weakness in the economy is expected and risk premiums are high, setting up conditions for a bounce once the central bank eases enough to offset the downturn. There is typically a meaningful increase in equity expected returns before the turn in the market because investors need to be incentivized back into equities and out of safe assets following significant losses." I have seem that in typical bottoms the market PE is around 13/14. Today is something like 19/20
3. Growth is typically below potential going into inflation-driven equity market troughs, and similarly, employment is also typically weak going into inflation-driven bear market bottoms. Today, though the economy has started to weaken, the labor market still very tight and the mayor concern for inflation still. This will not allow/motivate the FED to cut rates any time soon, and met condition 1.
4. Equity Bottoms are Typically Accompanied by Inflation Turning Over. But Today, moderating inflation is not accompanied by weaker growth and inflation seems unlikely to hit central bank targets any time soon. . As a result, the Fed is not yet being forced to choose between weak growth and high inflation and is still able to concentrate primarily on its inflation mandate.

They also said, main cases where the market has not continue to decline are:

• When inflation proved entirely driven by transitory factors and the central bank did not need to drive slowing to get inflation below target (as in 2018)

• When the central bank decided to let inflation run much hotter

Today, these outcomes still looks with a relatively low probability.