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Originally Posted by chassis
What is the thesis behind a 20% drop for 1-2 years?
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The thesis I’ve heard is that inflation is stubborn and somewhat unresponsive to the FED’s actions, so the FED keeps tightening and raising rates. That pushes the economy from “no landing” (currently priced into the market) through “soft landing” to “hard landing” (recession). The recession begins later this year and lasts to mid-late 2024 (it’s an election year, so there could be a lot of fiscal shenanigans offsetting the FED’s tightness). Markets are forward looking, so begin to recover probably right after the election. The expectation is more like a 15% S&P500 decline, not 20%.
There are some problems with this thesis, of course. One being the labor market remains tight and participation low, so there isn’t much slack there and it is unlikely unemployment will push up, at least for a while. Another is consumer spending remains high, although consumer debt is increasing as well. And while inflation is a problem, it seems consumers have largely adjusted to it, and those with fixed rate mortgages and car loans are suddenly flush. Finally the 401(k) flows continue to go into stocks, so there is cash flow that didn’t exist in the 1970s when this scenario actually played out (stagflation).