Markets are bad. They may still get much worse.

Valuations are stubbornly anchored above long-term averages. They do not accommodate the new economic paradigm taking shape. One that is less global, less profitable, and more costly to finance warranting significantly lower asset prices.

Corporate margins doubled since the 1980’s.

But the features that enabled this – Reganomics, globalization, geopolitics, and youthful demographics among others – are going backwards.

Reversing years of unfathomable money printing raises the cost burden for borrowers. It also mechanically lowers the present value of all financial assets. The Fed is bound by the inflation experience to see this through which increases capital scarcity and cost for years to come.

We don’t think asset prices yet account for the economic Cerberus: a Biden recession, lower long-term profitability, and higher long-term costs of capital.

Fair value for stocks could still be 50% lower. Acceptance of a new paradigm will take time. We caution against the impulse to time the market or bargain hunt prematurely. Adherence to dollar cost averaging programs is paramount.