September 14, 2022
Rate hikes: After yesterday’s CPI print, bond markets are now priced for a 75bp hike at next week’s meeting with expectations for November shifting from 50bp to 75bp and December going from 25bp to 50bp. If realized, the Fed will have raised rates by 450bp in just 9 months, which is larger and faster than the prior record from 1980 of 300bp over 16 months. The impact of today’s rate hikes should be larger than those from 1980 because debt/GDP levels are more than twice as high (~370% vs. ~150% in 1980). The Fed is pushing a faster/larger interest rate shock on an economy with >2x the amount of debt/GDP. And a higher debt/DGP ratio means there’s more debt that will be forced to roll into higher rates. While there’s greater proportion of fixed vs. floating rate debt today, the weighted average maturity of the fixed rate debt is only ~5 years with ~20% of total debt rolling every ~2 years.
SPX: Near-term technical support for the S&P 500 (SPX) remains at ~3900, which also lines up with 16x consensus 2023 SPX EPS estimates of $244. The long-term average multiple for the SPX is ~16x. Volumes are light and liquidity remains thin as long only managers wait for a shift in macro fundamentals and hedge funds keep leverage at record lows to protect balances/YTD returns. This leaves the S&P 500 more susceptible to flows from the systematic community (CTAs) who became sellers yesterday after the SPX crossed back below its 50 and 100 day moving averages. Note, these strategies were large buyers on Friday’s break above those averages. A break below ~3900 would open the SPX to a full retest of the June low at 3660. Momentum divergences in the days preceding the June low gives us more confidence for that level to hold. A break below 3660 would likely force capitulation in super large cap Tech where retail positioning is most crowded. Capitulation selling usually only lasts 1-2 days with something in the 3500 handles as the best place to add exposure.