July 25, 2024
Good morning,
Over the past few months, I’ve expressed concerns about the long-term health of the equity market related to a possible recession late this year or early next year. Long-term is measured in months/quarters, and it is outside the usual discounting mechanism of the market. That mechanism carries the “discount” label because it brings future events (as far as 5-7 months out) forward into current prices. It discounts time. This is a fundamental Law of any free-market auction process, operated on a regulated exchange, and has been since the beginning of time. If the best prognosticator of what the market will do in the future is the market’s behavior presently – that future is defined as 5-7 months. Market strategists often refer to it as the message of the market and it’s important to remember the message does not extend far into the future.
Over the past few months, the market message has been positive, with only a few warning signs (some divergences and concentration risks). As such, I’ve expressed comfort with the notion of the bull market continuing through the summer. Recall the clear skies ahead with possible thunderheads beyond the horizon as a simple narrative of near-term and possibly long-term market expectations of mine.
Yesterday was a good old-fashioned beatdown of every consensus trade in all the major markets (stocks, bonds, commodities, currency). It was classic correction behavior in that the biggest losses were proportionately registered in the trades with the biggest gains over the past year. Markets gapped down at the open yesterday on poor news from the first two Mag 7’s to report underwhelming results Tuesday night. But fear overtook greed for the rest of the day as broad selling accelerated all day into the market close.
Now, with all the above written as preamble, the big question this morning is: was yesterday’s selloff the start of a normal correction (down 5-10 percent) in a maturing bull market? Or is the market in the early stages of sniffing out a recession that, if it develops, is still likely to be beyond its normal discounting period of the market? No one can answer that question this morning. Either answer likely means more selling in the days ahead. My 2 cents worth of instinct leans toward the former answer – normal correction with the bull market resuming on the other side. I will let the market message that develops over the next month tell us if a recession is likely ahead.
Be well,
Mike
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