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Will market leadership change back to value since rates are on the move? Long-duration growth stocks are convex to interest rates, and the relative performance of cyclicals/value stocks (especially financials and energy) is positively correlated to rising yields. (THREAD)

So, in theory, if bond yields rise to a new equilibrium (I’m guessing 2% for the 10-year), then value should take over for now. /2

I doubt the latest employment report will dissuade the Fed from starting its taper soon, so that suggests that in 2022 the bond market could be facing the opposite supply/demand dynamic as in 2021. /3

The market is in mid-cycle and is following a typical pattern. This chart shows earnings growth in light blue and P/E growth in pink. The blue bars extend into 2022 because they include current estimates. (THREAD)

See the pattern? First, the market bottoms, then earnings typically bottom a few quarters later. In between those two inflection points is a big expansion in the P/E multiple. /2

From there, the P/E ratio peaks on a rate-of-change basis, then earnings growth goes positive, then the change in the P/E ratio turns negative, and then earnings growth peaks. /3

Price follows earnings, except at the tails. Very negative earnings growth tends to produce positive returns (red dots below on the left), because this usually occurs at market bottoms. This chart illustrates earnings growth (horizonal) and the S&P 500 return (vertical). (THREAD)

On the other hand, very positive earnings growth does not seem to be correlated (see the pink dots on the right in the chart above). /2

Historically, when earnings growth is above 30%, the regression line for earnings vs. price is flat as a pancake. Investors don’t reward extremely high earnings growth because it tends to be unsustainable. That's what happened in 2018 following the tax cuts. /3

Gaining ground: Bitcoin is back up to around $55k, which is still $10k below its all-time high of $64,870 but marks a significant improvement from the summer lows of $30k. What’s interesting here? (THREAD)

Where are we headed on the correlation between stocks and bonds? With some renewed upward pressure on bond yields, there's a tug-of-war between nominal R-star (The Fed’s published R* rate plus the current 2-year inflation rate) and monetary velocity. (THREAD)

As you can see above, the 10-year yield is somewhere in between those two. Will monetary velocity pick up and follow nominal R* higher, or will the current inflation spike be transitory and bring nominal R-Star back down? It’s one of the existential questions of the day. /2

Time to debunk that laziest of bubble arguments: the market-cap-to-GDP ratio.

It's severely lacking as a valuation metric. The ratio doesn't consider interest rates, which are at multi-year lows. It also does not consider operating margins, which are at multi-year highs. /2

Most importantly, comparing the S&P 500 to US GDP does not account for the fact that US large caps have become more and more global over the years. So let’s fix it. /3