US Equities: Resilient Force or Case Study in Denial?

There is no denying that there are multiple potential crises unfolding around the world, and one of these crises may be large enough, in terms of global and cross sector consequences, to cause a major market pull back. It is unclear what exactly equity markets are pricing in right now, but the triggering mechanism for the meltdown will be an “unexpected” crisis development, leading equity risk premiums to jump to higher levels, as investors reassess market-wide risk. For the crisis to have sustained consequences, it has to then feed into economic growth, perhaps through a drop in consumer and business confidence, and also into earnings and cash flows. After a decade of false alarms, investors are jaded, but the crisis calendar is full for the next two months, as Brexit, impeachment, Middle East turmoil and the trade war will all play out, almost on a daily basis.

I am not a macroeconomic forecaster, and I am going to pass on market timing, accept the fact that the markets of today are globally interconnected and more volatile than the markets of the last century, and stick to picking stocks. I hope that my choice of companies will provide at least partial protection in a market correction, but I know that if the market is down strongly, my stocks will be, as well. I know that some of you will disagree strongly with my market views, and I will not try to talk you out of them, since it is your money that you are investing, not mine, and your skills at market/macro forecasting may be much stronger than mine. If you are a master macroeconomic forecaster who believes that a perfect storm is coming where there is a global recession with a drop in earnings and a loss or corporate confidence (leading to a pull back on buybacks), perhaps accompanied by high inflation and high interest rates, you definitely should cash out, though I cannot think of a place for that cash to go, right now.

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Linked Spreadsheets

1. Implied Equity Risk Premium Calculator (October 1, 2019)

Disclosure: None