A market that rises 6% over two days to start a week and eventually dissolves by three-quarters is a confused market – a hologram that abandons good job news to the threat of monetary policy, turning newfound hope into familiar fear . . Stressed markets in strong macro crosshairs move in jerky, dramatic ways because asset prices have to travel a long way to find a buyer or seller to convince at any given time. Although the simple story of Wall Street 2022 is, “Don’t fight the Fed, or the tape,” after the loss of almost 25% S & P 500 and the worst stretch for bonds in years, the behavior can be seen differently from one eye to the next. The recent action can be variously described as a promising but vague repeat of the June market lows as the valuation and interest rate reset continues — or, as another brief moment of respite before another lower cascade against the Federation. A reserve that feels like constrained financial conditions is the cure itself and not an unfortunate side effect. Among the questions that would be helpful if answered to resolve what is likely to happen are: What are the markets already priced in? Will neoliberal bond yields beat stocks for your investor’s dollar? Is climate investor panic a prerequisite for a successful recovery? What is the price in? The market as a whole has grown significantly this year, which is not to say it’s enough. The S & P 500 on September 30 was a low of 3585, down 25% from the peak of January 3. To reach the average decline for all bear markets associated with the recession since the 1930s, it would not be but a total drop of 27%, to 3500, noted the strategist RBC Capital Lori Calvasina. The average of all those declines would mean a loss of 32% and a visit to 3260. The valuation reset was quick and significant for the S & P 500, from earnings 21 times the year before in January to now 16 – close to modern . – noon, but from the view from the top down it is not yet free. But, as noted here, the valuation setup is still quite heavy, the premium accrued in the mega-cap growth boom is not yet complete. Apple and Microsoft are still close to 22-times forward profits, Amazon and Tesla north of 40. The equal weight S & P 500 is now trading at 13.5. The small cap S & P 600 is scraping ten-year lows in P/E, both in absolute and relative terms. There may be no broader consensus argument than that forecast earnings looked too high into 2023. It’s hard to dispute the notion that estimates are underwhelming due to margin pressures, rising US dollar and accelerating global growth. But it is not the same as if analysts were unaware of the risks. Deutsche Bank notes that third-quarter S&P 500 forecasts are down 8 percentage points from last quarter’s reporting period. This should greatly reduce the hurdle for companies to meet or recover expectations, although the upside is likely to be small for 2023 yields. It is also common to argue that higher bond yields mean equities have to go at least more, although the historical record is quite mixed on this. A model based on the two-year Treasury yield suggests valuations should compress further, but rates were higher than they are now in the 1990s and P/Es have remained higher for years. The current yield on investment-grade debt indexes is around 5.6% at the 35-year median, says Bespoke Investment Group, suggesting that “mid-sized” equity valuations are not far off the mark. It doesn’t really come down to the algebra of stocks-vs.-bonds but whether the Federal Reserve intends to stimulate the economy and drive a decline in corporate profitability. With both nominal and real yields up considerably in a few months, a cautious new argument is emerging that bonds will create stiff competition against equities. This is the opposite of the TINA (There Is No Alternative) scenario that stocks were rising in the 2010s because bonds offered minimal returns. But this idea does not really come together. TINA assumed there was no alternative to bonds, but yields were low as investors (and, yes, central banks) poured trillions into bonds, finding them a viable alternative to stocks. And flows into equity funds were anemic most of the time returns were close to zero. The availability of good yields now should be welcome for anyone building a new portfolio, providing an income cushion to cushion price swings and allowing investors to collectively bear more equity risk. We’re not there yet – Treasury volatility is extremely high, forcing disciplined capital into a defensive frenzy and warning observers of some sort of stress episode in the capital markets. But the stock market can eventually balance out with a higher level of return prevailing, as it always has in previous cycles. Need more panic? There is no single textbook way to end bear markets. Often there is a crescendo of panic expressed in the wholesale liquidation of stocks and a desperate bid for downside protection that registers in a vertical spike in the Volatility Index to a new high near or above 40. Then there are times when a combination of time and grinding. the decline in prices continues until the sale ends and investors lose interest. Both entered June and in late September the selling intensity headed toward historic washout conditions. Things can always go to other extremes, of course. The VIX is spending extended periods above 30. Institutional equity exposures are near extreme levels approaching the levels of the Covid crash and earlier 2016 and 2011, according to Deutsche. Apple, utilities and other perceived havens have recently surrendered, part of what should be a slow-motion surrender. Fundstrat technical strategist Mark Newton says, surveying the full week’s rally-and-step action that led to the S&P 500’s 1.5% net gain, “Overall, it still looks very important the strength of the early week seen on Monday/Tuesday with great breadth and Furthermore, Thursday/Friday’s retraction does not take away from the benefits of what happened earlier in the week, as it is happening on negative breadth much lower than the early week breadth boom.” The decline in margin debt in recent months has just touched the “overdone” threshold, according to Ned Davis Research, which is heading for a bullish contrarian signal, although it went deeper before the lows large bear market in 2002 and 2009. These readings flirt with some rare “fat field” readings, which show that the pendulum is already far away from confidence and greed, but not enough for “Close to” status eyes and buy”. Investors would probably be lucky to see this market downturn end with valuations and investor positions having come this far, with the S & P 500 still up slightly over the past two years. But with seasonal factors improving and a relatively long “payback year” ahead, who’s to say there won’t be a market break on hard breaks before too long?