Weekly Update: Bad News to End a Brutal Month in the Markets
A few highlights from the week of 9/26
The WCLD cloud index ticked up a bit this week, up 1.6% to $26.67.
But the S&P hit a new low on the year on Friday amid a torrent of bad news. While macro conditions theoretically shouldn’t have much impact on the world of SaaS startups and early stage venture capital, it’s hard to ignore when credible market-watchers are predicting a “hard landing” for the US economy.
Why is their so much pessimism right now?
A good summary of the bear case comes from a recent interview with the legendary Stanley Druckenmiller (who never has had a down year in 40 years of investing):
So our central case is a hard landing by the end of ’23.
Druckenmiller typically speaks carefully, so it’s safe to assume he expects the hard landing well before the end of next year.
What’s going on?
One thing that stands out - I can get a 4% return from an essentially risk-free 1-year Treasury bond from the US government. That sounds awfully compelling relative to the carnage we’ve seen in so many other asset classes. No wonder equities have been selling off as rates have increased.
The climb in returns since late last year for the 1-year Treasury is truly remarkable:
Meanwhile, mortgage rates have similarly spiked, hitting heights not seen since 2007. Many lenders are now quoting a 30 year fixed mortgage at over 7%!
Not surprisingly, the housing market is turning. Bill McBride (aka Calculated Risk) notes that Goldman just significantly downgraded their housing market forecast and now predicts a 5-10% decline in US home prices. Keep in mind, that’s a nominal number. So if that number gets inflation-adjusted, the decline would be even steeper.1
If you want a reason to be pessimistic about the US economy & equities markets, think about what such a rapid, brutal reversal in housing could do to consumer spending.
The good news is that a serious recession will (probably) quell the inflation beasts. Hopefully, by this time next year we will be returning to a more stable and constructive macro climate. In the meantime, buckle up!
Podcast recommendation of the week:
Speaking of Druckenmiller, this is a great interview from a week ago on his career and his current market views. After Buffet & Munger, I would put Druckenmiller in my next rung of investor greats - remarkably successful investors who often have very interesting things to say about the world.
One amazing story he tells is how he was drawn into investing at the top of the dot com bubble in 2000. He famously blew up, but then was able to recover to keep his record of no down years intact.
One more reading recommendation from this week:
Benchmark Capital’s Bill Gurley had a fascinating interview published this past week. He pointed out that it’s a wonderful time to launch a startup.
…the environment for launching a start-up was really crazy the past five years. And the truth is that if you’re going to build something from scratch, this might be as good a time as you’ve had in a decade.
Gurley also makes the important distinction that late-stage VC is much more vulnerable to macro conditions than early stage:
And once you start doing late-stage things, the current environment has a drastic impact. But if you’re doing early-stage, these kinds of swings don’t really put you off the next incremental investment. There have been plenty of great companies started in the troughs to suggest that there’s no reason to stop investing.
For the best real-time analysis of housing market conditions follow Bill McBride