Monday, May 16, 2022

Morning Note: "A Key Risk?"

"The bottom line? Supply chains and inflation remain in flux, but there are signs that these issues could start to work themselves out in the second half. If they do, a less hawkish FOMC could be the market surprise for the second half. A key risk, though? Economic activity remains strong, but there are legitimate signals that demand has peaked."

Let that -- from Bespoke Investment Group's weekend note -- sink in "A key risk, though? Economic activity remains strong"... 

I've read some recent pundit-speculation that the market pain of late is all about recession risk rising to the fore. Well, at this particular juncture, I wonder. 

I mean, should the market truly embrace that notion, I wonder if we wouldn't actually see a rip-roaring rally -- as the notion that the economy is indeed in trouble would have the market anticipating a Fed pivot back to easy monetary policy... I.e., Bespoke ("key risk" right here for equities is that economic activity remains strong) may be onto something...

Now, if indeed recession is on our near-term horizon, any rip-roaring rally would be one to fade, big time! As deep/consequential bear markets are typically things of recessions...

By the way, while we're intimately cognizant of the recent slowing of the economy, a recession in the near-term offing is not -- yet -- our base case... 

That said, again from Bespoke, the kind of volatility we've seen in the Nasdaq Composite Index of late is rare outside, or in the vicinity, of, recessions:
"Do Big Declines Foretell a Looming Recession?
Through the close on Wednesday, the Nasdaq was down more than 20% in a 30 –day span. Throughout the Nasdaq's history, you can count on two hands the number of other periods where it dropped 20% in a six-week span, so the question one has to ask is what message, if any, is the Nasdaq sending? The chart below shows the rolling 30-day percent change of the Nasdaq going back to its inception in 1971 with the gray line indicating the boundary for a 20% decline in the 30-day span, the green line indicating 20% 30-day gains, and the gray shading representing recessions.
In looking at where prior declines occurred relative to the business cycle, only the drops surrounding the 1987 Crash and Russian debt default in 1998 (green arrows) did not occur either during or in a one-year period surrounding the start and end of a recession."
In a note last Friday I suggested that rising fear is actually bullish for equities. Well, save, that is, for when the economy's in recession.
Stay tuned...

Asian equities were mixed overnight, with 8 of the 16 markets we track closing higher.

Europe's leaning red so far this morning, with 13 of the 19 bourses we follow trading lower as I type.

US stocks are struggling to start the week: Dow down 225 points (0.70%), SP500 down 0.93%, SP500 Equal Weight down 0.89%, Nasdaq 100 down 1.29%, Nasdaq Comp down 1.26%, Russell 2000 down 0.97%.

The VIX sits at 29.47, up 2.08%.

Oil futures are down 0.29%, gold's down 0.05%, silver's up 1.51%, copper futures are up 0.02% and the ag complex (DBA) is up 2.16%.

The 10-year treasury is up (yield down) and the dollar is down 0.09%.

Among our 37 core positions (excluding cash and short-term bond ETF), 16 -- led by energy stocks, MP Materials, ag futures, metals miners and silver -- are in the green so far this morning. The losers are being led lower by water stocks, tech stocks, South Korean equities, financial stocks and Eurozone equities.

"From childhood I'm forced to learn, to memorize. And I'm trained to beat problems. My brain has been conditioned to solve mathematical problems, from childhood. In university, problems problems problems. So, the brain is conditioned to problems. And then it meets problems, and its resolution of the problem is making the problem more complicated and the solution of it increases ten different other problems -- that's what the politicians are doing."  --J. Krishnamurti

Yes, the politicians, and the Federal Reserve...

Have a great day!


  1. Nicely said! I learn more from reading your blog in comparison to listening to Fed Powell. This is a great quote by saying: "its resolution of the problem is making the problem more complicated and the solution of it increases ten different other problems." I read an article that said Fed Powell is trying to replicate a playbook from 1994 for a soft landing. I have doubt with that approach because of the current magnitudes of multiple problems.