Amir Kahanovitz, Chief Economist, Phoenix-Excellence
03/01/2022
The S & P500 closed 2021 with an increase of 27% and the Tel Aviv 125 with 31%, the third year in a row of a double-digit increase, and despite this the stock market only got cheaper! Yes, cheap! The “price” of shares in relation to their expected profitability today stands at an expected earnings multiple of 21, while at the beginning of 2021 the earnings multiple was higher – 22.8. Admittedly the stock market is cheap in terms of multiplier but Bloomberg economists claim that the fact that in 2021 no significant correction was recorded, in which the S&P falls below its moving average of 200 days, is a bad sign. Historically they claim after such years (without significant correction) usually come relatively weak years with an average decline of 0.7%.
Despite the (relatively) cheap Wall Street market closing the last trading day of 2021 in decline, and not because of weak reports or weak macro data, on the contrary, the data was strong and highlighted the publication of a number of U.S. unemployment grant seekers falling for the first time on the eve of the Corona. . Many blamed at the end of the sucks of 2021 “tweet” by Elon Musk Because according to his gut feeling in 2022 a recession will start, “around spring or summer”. Even if the gut feeling is correct it is not at all certain that such an event will necessarily be negative. Even so, analysts are not building on too much growth in corporate profitability in 2022, after it soared by 41% in 2021, but are more afraid of rising interest rates and inflation, risks that are likely to dissipate in a recession scenario. So we will be left with a recession in profitability and less risk factors, a combination that might not be bad.
The recent declines in many of the technology stocks are perceived by many as cracks in the pricing of the entire market. To illustrate, two-thirds of companies that issued U.S. shares in 2021 are now trading below their issue prices, so the demand for initial public offerings in 2022 may be less strong. In terms of supply, the WSJ now has more than 900 private companies worldwide worth over a billion Dollars and according to lawyers and bankers with whom few have inquired as a result of the recent weakness of their IPO plans.This combination, of disappointment from the 2021 IPOs along with the expected high supply in 2022 will be a little beyond what the market will be able to digest?
Paradox – Rising inflation expectations support the long-term nominal inflation – The exit from the corona crisis was on steroids, which was reflected in every parameter, from the tight labor market to the rampant inflation, and all this only a year and a bit after the end of the recession. These naturally led to expectations of accelerated interest rate hikes in the US as early as this year, with the mention that after the sub-prime the Fed waited six years, until the end of 2015, and even then made only one hike. The long ones tend to go down. In March 21 the yield for 5 years in 5 years stood at 2.59% and today is 1.78%.
Today, the Bank of Israel decided on interest ratesWe do not see any obvious reason why the Bank of Israel should be required to raise interest rates for years to come. Not the actual inflation, not the expected inflation and certainly not the soaring shekel. In the US, a survey of Purchasing Managers will be published today.
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