The Beatings Will Continue Until Morale Improves
The S&P 500 is now officially in a bear market. My thoughts on the macro backdrop and one stock that I bought today in the market carnage.
The S&P 500 is set to record its 7th consecutive down week. As I write this, the index is down nearly 2% today after failing to take out a resistance level this morning. The “bottom” is still not in, it seems. As I said a little over a week ago, every risk asset seems to be the same trade at the moment. You’re either in dollars or you’re getting waxed. The S&P is now in an official “bear market.” Which is generally defined as a 20% drawdown from the high. The Nasdaq has already been there for months. It has taken the S&P a little over 4 months to get from the high to “bear.”
For context, the drawdown at the beginning of the lockdown in Q1-20 was deeper and faster. That meltdown was roughly 35% and took just 4 weeks. That was a considerable outlier in the history of broad market selloffs. A closer analog to what we’re experiencing right now might be what happened in late 2018. That selloff was a little over 20% and started after the Fed’s balance sheet roll off began to intensify.
The blue line is total assets on the central bank sheet and the green line is the S&P 500. What is notable is the market turned around before the roll off ended and shortly after the central bank started buying assets again. You can see when the Fed officially pivoted and started buying assets the market rally intensified and broke out to new highs. That was six full months before the COVID crash. The response to which has been well documented here and elsewhere; essentially money printer go brrrr = market melt up.
There’s another consideration obviously and that’s cost of credit. By the time the Fed had reversed course on balance sheet roll off, the effective rate had topped as well. So to recap, the Fed was back in the market doing asset purchases, the cost of capital was already at a cycle high, and the market sniffed it all out. And again, this was all after just a 20% drawdown in the broad market.
At the end of the day, everyone seems to understand you can’t fight the Fed, but you also have to be positioned for what the central bank can actually do. Perhaps more than what it says it can do. The red trend line that I’ve added to that Fed chart above is a nearly perfect indicator for the last three rate cycle tops. If that trend holds, it’s projecting a peak of 1.8 in the funds rate. That gives us maybe two more 50 bps hikes in this cycle, tops. There’s just no way the high paid analysts at big name firms can’t see this.
I’m not saying the market is at a bottom right now. But I don’t think we’re that far away. Again, I’m of the opinion that the Federal Reserve can’t meaningfully raise rates much more. I don’t think they’re serious about fighting inflation despite all of the tough talk. The central bank has failed at price stability. Its only other mandate is full employment. If the market continues lower, the layoffs will begin to intensify.
The Fed has two options; sacrifice the dollar or sacrifice what remains of the economy. If you believe, as I do, that a Central Bank Digital Currency (CBDC) is going to be implemented at some point in the next few years, then a monetary system shift of that magnitude likely requires a currency collapse. Furthermore, elections are right around the corner. Surely the establishment doesn’t want high unemployment heading into mid-terms. And initial jobless claims appear to have bottomed…
The 218k figure from this past week is the largest number since January. We can only guess what will be blamed for the liquidity pivot. Maybe layoffs. Maybe “monkeypox.” Whatever TF that is. If history is a guide, the money printer will be back. Which stocks benefit from the brrrr?
This one has potential…
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