August 6, 2024
Good morning,
Fortunately, it looks like “melt-down” Monday is being followed by “turnaround” Tuesday this morning. U.S. equity futures are up a percent or so across the board, and more importantly, Japan was up 10% in their Tuesday trading session. Is that it? Can we all breathe a sigh of relief? If we define “it” as all-asset, 3-standard deviation moves exaggerated by a supercharged emotional environment, then yes, we can all breathe a sigh of relief that global markets are not going over a cliff. But big moves in markets are rarely wrong directionally. It is the magnitude of the moves that are often exaggerated – typically by fear.
I suspect this market will be looked back on as a correction that began with the July 16th S&P 500 Index (SPX) high of 5670. It was the beginning of earnings season, and while mega-cap earnings have been good, they just haven’t been good enough for a market-priced close to perfection. SPX closed down -8.52% from its 7/16 high last night (that is not even an official correction, defined as down 10%). Inside this correction story were a surprisingly weak employment number (probably exaggerated by the weather) and a massive deleveraging of a global carry trade in the fixed-income and currency markets (this is the cause of the devastating moves in Japan). For the record, that unwind is estimated to be only half over, so we won’t be blamed for whistling past the cemetery for the next few days.
The fireworks of 3-6% daily declines are probably over, but with the VIX closing at 38 last night (touched 60 intra-day yesterday), volatile price action should still be expected (more along the lines of 1-2% moves).
If we chalk up the scary magnitude of the moves to exaggerated emotional behavior, how do we reconcile the typically accurate direction of the move? I suspect stripping out a lot of noise embedded in the past week’s sell-off is the beginning of the market discounting a growing fear of recession 6-ish months from now. I believe the market has begun a multi-month topping process, which is sooner than what I thought would be September.
See you again on Thursday.
Be well,
Mike
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