Time Is Ripe for a Market Contraction: Liz Young

What’s your overall forecast for the stock market?

Things have remained too high despite the fact that there’s been a pullback. It’s still too expensive, given where rates are and because of how low the VIX is [gauge of market’s expected volatility over coming 30 days]. 

It’s ripe for some volatility to come in if the Fed surprises us and gets more hawkish than people are expecting or if poor economic data starts to come in.

Right now, the stock market is pricing in a soft landing. So anything that starts to look different from that could be a bit of a surprise.

What do you expect in terms of recession, then?

I’m not in the soft-landing camp. I think there’s likely a contraction coming because that’s what resets the business cycle. We’re in late cycle and have been for quite a while.

The average recession starts about 14 months after a yield-curve inversion. Well, this is about month 14 or 15. 

And if you look at the usual lag in monetary policy, that’s about 12 to 18 months. We’re in in month 18 since they started the hiking cycle.

What are your thoughts about inflation?

What happened in the last couple of months and what, I think, is going to continue happening through fall is that not only did oil prices rise, but some of the goods inflation that we thought was taken care of isn’t necessarily all gone.

And the services inflation isn’t completely taken care of either. 

Inflation has come down. But 3.7% is still considerably above above target; and core inflation is still considerably above target, not to mention oil prices being back up.

That mixture of forces, none of which are that great, hasn’t shown through in the economic data as of yet.

When do you expect consumers to start slowing their spending, including charging on their credit cards?

[The latter] has slowed down a bit. But the consumer will spend as long as the consumer feels employed. And so far, the labor market has not been an issue.

We still have plenty of jobs available, though the number of jobs has certainly come down. That’s the first step in labor-market cooling.

The August market pullback wasn’t enough to scare people. When the market is up and inflation is down and consumers are employed, they’re going to feel confident to spend. 

But if the labor market starts to cool off, people will get nervous.

What’s your outlook for corporate earnings?

The United Auto Workers isn’t the only group who feels: “Costs have been passed through, but our wages haven’t kept up with that.”

Companies are stuck in a bit of a predicament: They need workers, but they have to pay these workers in order to attract them. Now, however, they can’t pass prices through as much as they had been. Revenues are down.

So their wage costs go up; and on the lower-revenue numbers, they’ve got a margin problem. 

We’ve already seen margins compressed. We’re going to continue to see that.

The expectation for earnings to be [even] 9% growth in 2024, I think is pretty lofty.