Warren Pies of 3Fourteen join the Compound & Friends show 9 hours ago and brought his data charts.
This post is my notes of what he presented.
I lead with his conclusion.
3Fourteen is currently overweight bonds. They are done de-risking and are looking for a bottom to buy. They think that the yields are coming down because the Federal Reserve is going to cut 4 times if not more this year. The underlying economy is not a 4% Fed Funds rate economy. They think that there will be a negative feedback loop that will permeate the government. There is currently a washed out sentiment in the market.
The chart above shows the years where the first quarter returns were negative. Out of all the seasonality trends, 3Fourteen find that the first quarter returns has greater predictive power to how the market will go for the rest of the year.
This chart shows the performance of 2nd to 4th quarter if we have a positive or negative 1st quarter. The lack of momentum in Q1 will carry through the year. If 1st quarter is good, there is chasing effect and if 1st quarter is negative, most investors spend the years controlling their positions.
This chart shows what happens next 1 year after we are down 10 percent in the market AND we don’t have a recession. X-axis shows the days elapsed before and after. Median downside is 5.6% and average downside 7.3%. There are some problematic down years but they are mainly positive.
This means that if we are in a non-recessionary period, now is closer to the bottom.
The chart above shows the cases when it is recessionary. More are negative returns if it is a recession. After you are down 10 percent, you are down another 15%. So the question on our mind is whether we are entering a recession.
If we are entering a recession, we are looking at the S&P 500 at less than 4,800.
Michael Batnick reports that we have 48 companies that have currently reported earnings this quarter (mostly financials), 71% beat their guidance. The blended earnings growth rate is 7.5%.
The vertical line in the chart above shows where we are when the S&P 500 is down 10%. Before that is shows the Forward EPS (earnings per share) going into the corrections and after the EPS after the corrections. We can see the stark difference in how the EPS track for recessionary and non-recessionary cases. We were tracking the non-recessionary pathway until 2 weeks ago.
3Fourteen has 3 layers how they look at the probability of recession:
- Economics things like housing and construction data which usually leads employment. These data usually are slower, which might not always be best.
- Watch the credit spreads and how forward earnings per share evolves.
- How the stock market is treating firms that beat versus miss earnings.
This chart shows that this drawdown took us back to the point 242 days ago, which is almost a calendar year ago.
This is a way for 3Fourteen to track the “pain” in the market. They think that this reset is important for investor psychology.
242 days is pretty shallow for a bear market. The data tells them that a lot of investors are hoping for this levels to hold and moves back up. The average bear market takes 400 days to reset.
This chart shows the median Wallstreet market strategist targets versus where the S&P 500 is. The line below shows the spread between the two converted to percentage. The trading strategy is that if the analysts have forecast 5% below the S&P 500 buy.
This chart is looking at the percentage of inverse + levered long ETFs. The theory is a lot of margin speculation have transited to these ETFs. This is turning out to be a good sentiment and position indicator. Getting to 50% helps 60% is best (forward 1 year return has always been positive if it gets to 60%).
This chart shows the equity allocation for the funds that run strategies that target a specific volatility profile in their funds. If the volatility of the market goes up, they have to deleverage if they follow the strategy. This is a very common way for certain funds to run their portfolios.
Currently, the funds have de-risked so much.
They turn this de-risking to a trading strategy by looking at when the equity allocation get down and slowly creep u. It is very rare to see volatility targeting funds get below 20% exposure (only 7 times including now).
In general, this comes at market lows and the six-month return is 13% historically.
This chart shows the divergence between US interest rate and the currency.
The US people buy goods & services and the other countries invest in the US stock markets. Foreign holdings of US stocks have exploded post-covid. If we attempt to kill the trade deficit, this flow into the US stock market will be shut off.
Before the tariffs are in place, interest rates have been restrictive for growth. Here you see that the payroll growth for Ex-government, healthcare and education to be flat, which is recession levels.
If we layer the chart above with the stock market, the percentage of industries with job gains may be an indicator for you to get out of the market.
This chart decomposed the state of the job cuts. You can see that the government job cuts really spike in a levels not seen from prior.
The construction payroll is 3Fourteen’s economic source of truth.
We are always looking for leading indicators and they think that housing and construction jobs lead the economy. What the data indicates is that the payrolls are still increasing but the deeper work shows the amount of housing and construction jobs is not supportive of this number of jobs, which means that eventually the number of jobs will have to come down.
This chart shows the amount of unsold inventory for more than 6 months of DR Horton, the largest builder in US. The updated figures shows the inventory coming down slightly.
Credit card delinquency are on the rise.
This chart shows the degree of fiscal deficit as a percentage of GDP. Warren says it is very difficult to have a recession with a deficit that is this high. Despite the efforts of DOGE, they are observing higher deficit instead of improvement.
This is supportive of the economy.
These two charts show that as the US consumers own a large amount of stocks, this drawdown affect their propensity to spend as well.
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