On Valuation, Liquidity & Inflation

Check out the accompanying pdf and chart collection. Executive Summary: The S&P 500’s forward P/E has sunk practically to its historical average of 15.0. What happens to it next depends much on what happens to the economy. If our growth recession scenario continues to play out (to which we subjectively assign 60% odds), the historical average valuation likely will hold and the S&P 500 drift sideways until climbing again in 2023; if a hard-landing recession scenario unfolds (40% odds), the P/E may sink into the single digits. … On the bright side, the financial markets have plenty of liquidity to buoy valuations. … Also: We look at what inflation has been doing by two different measures, the CPI and PCED, and examine how they differ.