We believe the US economy is very resilient relative to the rest of the world and will avoid a major recession in 2023. We also believe inflation is declining steadily and corporate earnings are likely to continue to be resilient.
The Fed has decreased the money supply by 17.5% so far this year, which has caused the dollar to appreciate and mortgage rates to skyrocket. This will set the stage for inflation to decline over the next year.
The key risk to the economy is an erratic and incompetent Fed that has a horrendous track record of forecasting inflation. We are near-term neutral on the market as an overly hawkish Fed and bad seasonal factors weigh on the market resulting in an S&P range of 3,600-4,200 during the Fall.
Stock Market Outlook:
The recent rise in interest rates has caused our fair value estimate for the S&P to drop 700 points to 3,800, based on the current 10-year interest rate of 3.70%. We expect the stock market to rally in the 4th quarter as inflation continues to decline, long term interest rates decline, we enter earnings season, and the election results are confirmed.
We do not expect a major recession in the US in 2022 due to a very resilient housing sector with an ongoing shortage of housing and tail winds from the enormous 80% US energy cost advantage relative to the rest of the world. We expect 2022 economic growth to slow dramatically into the 0-2% range due to erratic and very hawkish monetary policy.
We expect a slow-down in the housing sector but no major decline in construction, which would result in a recession as we have a shortage of homes in the US. The ratio of households to houses is approximately 110% which is below the average for the last 50 years and well below the peak of 120% reached during the financial crisis. In addition, the total inventory of houses for sale is at an all-time low of 1.3MM homes vs. 4.5MM homes for sale at the peak of the 2009 financial crisis. The national vacancy rate is close to an all-time low of 5.0% vs. the peak of 11.1% during the 2009 financial crisis.