August 2023 Newsletter

Economic Cycle News

Are we approaching the best or worst time to invest?

By Vaughn Woods, CFP, MBA


Reminders of the Relationship Between Rates and Market Valuations


When interest rates go up and corporate earnings go down, it’s the worst time to invest.

Conversely, when interest rates go down and earnings go up, it’s the best time to invest.

So, where are we in the economic cycle, the worst or best time to invest? Most of the time we’re in the middle of a multi-year expansion, a flattening out period, or a recession. At times, the economic cycle appears poised to go in either direction. At these moments some people make big bets on what will happen next. Michael Burry, for example, of The Big Short movie fame, just bet $1.6 billion in puts on a market crash.

Enter the retail sales figures for July 2022. The data came in hot, up 1% for the month. This was followed by retailer, Target, that came in with earnings substantially above estimates, a shocker for those expecting retailers to slow. As of August of 2023, it appears instead of the economy slowing, a reacceleration of GDP may be underway toward, at worst, stagflation if the consumer slows down. This means the Fed may engage in more monetary pressure going forward to slow inflation.

In the face of an economy that appears to be stubbornly inflationary, despite Fed rate hikes and even reaccelerating, investors may want to remember what Federal Reserve Chair Jerome Powell discussed in the November 2022 Open Market Committee meeting about the idea that monetary policy involves “long and variable lags.”  That is, it takes time for rate hikes to begin to slow the economy.

How long? According to a study done by the late, great Milton Friedman, it can take between 6 and 29 months to witness a slowing, and none of these cycles included both a short-lived COVID-19 plunge in the stock market followed by a massive increase in government spending.

Congress has passed some $4.4 trillion in stimulus and spending measures since 2020. Each of these spending measures supports GDP and if the calibration of economic activity is not perfect, inflation. The U.S. economy is a complex system with many moving parts. It can be difficult to predict how long it will take for the economy to react to a change in interest rates.

The adage, “Don’t Fight the Fed,” suggests the Fed holds a strong hand.  Eventually slowing will occur. Yet the lag effect between Fed actions and slowing can take 6-18 months before rate hikes begin to lower inflation, because it takes time for businesses and consumers to adjust their behavior to the higher costs of loans, credit card debt, and mortgages.

Earnings Estimates for 2023 and 2024

Earnings estimates for the S&P 500 are now projected to come in at $219 for 2023. For 2024, earnings are projected to grow to $245. Goldman Sachs expects core inflation to fall enough for the Federal Reserve to start cutting rates in Q2 2024. If so, that could be enough to encourage investors to dream about a period in which earnings are higher and earnings multiples are higher. Or as one analyst recently stated, there are only two market variables, earnings, and price/earnings multiples.  If both are going up, you have fertile soil for the stock market.

Measuring P/E Multiples

As of August of 2023, the S&P 500 appears to be trading at an 18.5 times 2024 earnings multiple. Price-to-earnings multiples declined through much of 2022 and have expanded in 2023. Yet, as you can see from this chart they move up and down throughout the year, each year. Below you’ll find the S&P 500 multiple trading range over the last ten years.

Year    High    Low     Mean

2013   22.88  12.90  17.42

2014   20.25  12.31  15.78

2015   20.57  10.22  14.93

2016   22.08  13.80  17.44

2017   25.34  15.3    20.02

2018   29.59  14.20  21.89

2019   22.23  13.7    17.97

2020   31.62  10.90  20.65

2021   41.72  18.80  29.00

2022   31.40  12.90  20.20

This chart shows the price-to-earnings multiple for the S&P 500 has been on an upward trend over the past 10 years, with the average multiple increasing from 17.42 in 2013 to 20.20 in 2022. The high P/E multiple for the S&P 500 was 41.72 in 2021, which occurred during a phase I’ll label: post-pandemic enthusiasm. The low price-to-earnings multiple for the S&P 500 was 10.90 in 2020, which was during a federally-mandated lockdown due to COVID-19 pandemic.

Beyond P/E and on to Piotroski Scoring

It is important to note that the metric known as price-to-earnings multiple is just one measure of a stock’s valuation, and it should not be used in isolation to make investment decisions. Other factors to consider include the company’s earnings growth potential, its financial strength, Its valuation, and its competitive landscape. We also assess every company’s free cash flow, projected earnings into the future and add to this a quantitative measure called a Piotroski F-score.

A company that scores a 9 on the Piotroski score is considered to have a very strong financial position in its industry, while a company that scores a 0 is assessed to be in a very weak financial position. The Piotroski F-score measures change in gross margins, operating cash flow to total assets, inventory turnover, change in total liabilities, dividends per share, return on assets, stock repurchases, and number of years in operation.

After completing his PhD, Piotroski joined the faculty of the University of Chicago Booth School of Business. He remained at Chicago Booth for 10 years, before moving to the Stanford Graduate School of Business in 2000.

In 2000, Piotroski published a paper in the Journal of Accounting Research entitled “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers.” In this paper, Piotroski introduced the Piotroski F-Score, which is a quantitative model that uses nine financial ratios to assess the financial strength of a company.

The Piotroski F-Score has been used by investors and academics alike to identify strong financial performers. Studies have shown that stocks with a high Piotroski F-Score tend to outperform the market over the long term.

While there are many reasons in August of 2023 to remember that interest rates do affect stock and bond values, and that a long and variable lag effect may be underway to slow inflation, it is also important to recognize that no one really knows whether rates will fall all that much going forward. That’s why every day is a new learning opportunity to adjust asset allocation as need be while not being consumed by aggressive and possibly axe-to-grind prognostications.




Vaughn L. Woods, CFP, MBA

Vaughn Woods Financial Group, Inc.

2226 Avenida De La Playa

La Jolla, CA 92037



Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal.  Past performance is not a guarantee of future results.  Asset allocation cannot assure a profit nor protect against loss.  Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed.  Views expressed in this newsletter are those of Vaughn Woods and Vaughn Woods Financial Group and may not reflect the views of Bolton Global Capital or Bolton Global Asset Management.  The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  VW1/VWA0290.