Where to?
Disclaimer: this is not investment advice. Before taking any investment decision, do your own research.
In the post on August 9, I mentioned that by comparing to the 2007–2009 financial crisis one could argue that too much complacency could be harmful.
In October 2nd, I wrote again to point out that the comparison with 2007–2009 was rhyming eerily based on timing and percent of drops and bear market rallies. Although one would expect such relation to break fast, so far we are still very close. For the relation to maintain reasonable predictive value, the next rally should start strong next week (the low was expected on October 11th or 12th.) And take us at least 10% up (3850 in the S&P), or probably higher (maybe 15% or 4025) since 2022 seems a bit more violent.
Divergence starting?
The most reasonable outcome would be a divergence soon that makes the comparison useless. From a technical perspective, 3500 in the S&P 500 seems to be a critical point. It’s psychological and technical marker that quite a few traders follow, marking an excellent point to start a bear market rally.
The last week has shown the kind of divergence between market participants that I would expect in a bear market at times where we are starting to be oversold. It is as common to hear “the bottom is in” as “the floor has been taken off.” Both sides with reasonable points.
it’s starting to be common to listen people saying that this is just the beginning, that a reasonable pull back from the “everything bubble” should take us down to 2018 levels or under, maybe retesting the Covid panic lows.
It’s also common to hear that the main driver of the current downturn, inflation, has already shown signs of receding. That the probability of a strong and deep recession is too high and that this will make the Fed resume its accommodative tradition soon. Technically, some see the double bottom (June and now) as the end of the bear market.
My take
I see a little more rhyming in the near future. Although I can’t discount a major event like what Lehman’s was in 2008 taking the markets lower to levels most participants are not prepared for, if nothing special happens my best guess is we are in for a rally soon. Either it already started on Thursday 13th or it may come after another 8%–12% drop.
Longer term, I’m afraid I have no evidence to announce the end of the bear market. I don’t see the Fed “pivoting” as I hear others assuming. I see market participants with recency bias, only looking at events since the 90’s without paying enough attention to periods of increasing inflation. Although the Fed has a dual mandate of keeping inflation low and employment high, I understand the inflation mandate as a stronger one since the ’70s. The Fed will pay little attention to employment, GDP and consumer sentiment until inflation expectations are in check and core CPI is trending clearly lower. Even if unemployment goes up to 6% and there’s a deep contraction in GDP during the next year I don’t expect the Fed to reverse until inflation is well under control.
And that is just the deflation of the “everything bubble,” not considering any political or natural world crisis.
So my best guess for S&P 500 during the next 12–24 month is a choppy downtrend, with brutal drops and rallies. Unless the inflation problem is clearly trending lower for at least 6 months, I don’t see a bear market ending before the 2500 points in the S&P 500.
How does it affect TSLA?
Divergence on what to expect for Tesla is even higher. One camp is set on multiples compression and believe that there’s a long way to go down. The other camp is focused on earnings growth. Right now TSLA P/E ratio is below 75 while AMZN is close to 100.
Although other big tech are near 20 P/E, there’s a general expectation for them to have a big drop in earnings during the next year, which would keep them at higher P/E while prices keep falling.
In my view, clearly in the bull camp, Tesla will grow earnings even in a strong recession that takes light vehicles sales to a further 30% drop (now 25% lower from peak in 2017.) It may even see higher earnings growth than the 50% long term CAGR guided by management during 2023.
Also, it’s the first time since July 2020 that the price is lower than a 50% growth from IPO.
Although one could argue that TSLA has spend below that 50% CAGR for a large part of it’s existence (the lowest point in 2019 was .23,) there’s a large difference between then and now: TSLA didn’t have consistent profits until 3Q2019 and had very little profits during the first half of 2020 (with quite a few bears arguing it was a temporal and artificial profit.) Tesla’s profits have been growing absurdly since then:
Also, Tesla had a lot of debt which has since repaid:
High profits and low debt results in a very high Altman Z-score of over 16.
In summary, I don’t expect the relation to 50% CAGR to be below 1 for long and would be very surprised to see it below .66. That is, although I don’t expect it, I wouldn’t be surprised with a drop to 140. But would be very surprised to see it go much lower than that. Risk/returns favors the bulls.
But still, I would be very careful with margins. Trying to predict markets on rationality and trends has taken a lot of fortunes. Make sure that time is on your side.
