In one of Jim Paulsen’s last reports before retiring, penned November 2022, Paulsen urged clients to increase equity market exposure/s. He understood the nuances surrounding the concept of “market liquidity”, which is often muddled and conflated with competing narratives. Let’s look back at Paulsen’s commentary and reporting from November 2022 in the below:
“So when will liquidity/M2 Supply pivot from contracting to growing again? Annual CPI inflation is set to fall substantially in the coming months, which greatly increases the odds that real liquidity growth is currently at or near its lows. Indeed, major tops in the inflation rate have historically marked the lows in real liquidity growth, and as they inflect higher. The Fed halting rate hikes is not necessary for liquidity growth to resume, although it can spur it further. Inflation peaked when real liquidity growth bottomed in 1966, 1970, 1974, and 1980. The CPI is now at 8.2%, but if it decreases to 3-4.5% in the coming year, real liquidity growth will rise even if the nominal money supply contracts (which seems doubtful). Also, the pace of real economic growth and inflation are both poised to continue slowing in the coming year due to the continued impact of contractionary economic policies, including significantly weaker monetary and fiscal growth, a much stronger U.S. dollar, and higher bond yields across the curve. Slower economic activity tends to reduce the pool of overall liquidity. Finally, the Fed is likely to be forced to pause its tightening campaign and perhaps ease the funds rate in 2023.”
Paulsen recognized that while the financial media focused on the concept of Fed-driven market liquidity, this is largely a misnomer, a mistaken concept akin to the colloquial belief that Gold is a hedge against inflation, which there is no supporting data, widely confusing the investor population during the last bout of economic inflation. Paulsen articulated and informed clients that the most consistent, time-tested and evidenced liquidity pivot comes from a surge in the inflation rate and its subsequent disinflationary period. Prices rising reduces the value and circulation of the Dollar, while prices rapidly falling increases the spending value/quality of the Dollar and the quantities of dollars in circulation. It is only one of the reasons we already see (2022) M2 Velocity rocketing higher, and in 2023 at levels not witnessed in the modern era.
While many were waiting for a Fed-driven liquidity pivot, directed at M2 Money Supply, Paulsen understood and disseminated this would prove a faulty thesis, especially where so much money/Dollars already existed within the holdings of households and corporate balance sheets. The sell-side analyst community was likely to miss the bulk of a forecast bullish trend, leaning into olden days monetary theories, which really have not held merit since the 1990s.
Giving credit to the great and retired Jim Paulsen, I would feel remiss if I didn’t also recognize that Finom Group’s team, led by chief market strategist Seth Golden, once again called THE market bottom, encouraged and outlined a plan for Finom Group faithful to increase equity market exposure. The below screenshot was taken from within our October 2022 Research Report (delivered Sunday mornings, subscribe to receive):
At the time, we were not looking to call the bottom, but making the case for “A” market bottom at the very least. The objective of an investor is to seek value, and with a market falling 28% peak-to-trough, value was identified and a game plan was issued for the taking-up of value.
Following the aforementioned investor discipline were iterations and articulations by Fundstrat’s Tom Lee. While often chided for being a perma-bull, which is in-line with the history of the markets trajectory, his dedication to the discipline of seeking and taking-up of value was demonstrated in 2022. Like Paulsen, Tom Lee encouraged investors to achieve the value at-hand, rather than wait for the Fed to pivot. History proved, at the very least, a guide and a recognition of human behavior. Human behavior in the market is of the most constant and consistent aspect of markets. Lee used such understandings with respect to the Volker era and applied them today.
The following graphic was offered by Tom Lee and disseminated to the Fundstrat family of investors in 2022:
As one can see atop the graphic, the verbiage: “Don’t Wait For Fed…” Fast-forward to the present day and, unfortunately, there are many an investor who are waiting for an all-clear signal and now being bombarded by warnings that should the Fed pivot to a rate cutting cycle, that would be a warning signal.
Last, but certainly not least, Ryan Detrick of Carson Investment Research and formerly of LPL Financial. Detrick also came into 2023 recognizing the bottom was likely formed in October of 2022, supporting this belief with quantitative and qualitative data sets. Below is a screenshot for Carson Investment Research advisors and clientele issued at the beginning of 2023:
The lesson, we think here, is that good investors, analysts, and strategists are less concerned about down past the 20% mark, and more apt to accept the deep value of the day. They are willing to wait for the inevitable resumption of the uptrend, while recognizing that history is not always a perfect guide, but a very useful roadmap that helps facilitate a strong emotional quotient. Investors were given a grand compounding opportunity, which is still afoot, to run the 3,500 to eventual 4,800 price range twice. Savvy investors look at that articulation as the BIG PICTURE!
With all of the aforementioned in mind, we all have choices to make as investors; choose to align with the long-term probabilities, as they were great coming into 2023, as previously outlined via the below chart:
Notice the chart date ends at 2022, and we certainly made sure our Finom Group members had this data coming into the New Year. Subscribe to our weekly Research Reports and intra-week data series, as we hope to help you along your investing journey!
