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Why The Stock Selloff Will Resume
Be careful, it could be a trap.
That's one way to read the latest from Morgan Stanley's Mike Wilson, who, in a Monday note, cautioned against interpreting recent declines in oil prices and yields as evidence of peak inflation. "In our view, both... are being driven more by fears of an economic slowdown," he said.
That's an important distinction, because only peak inflation opens the door to a less aggressive Fed. I touched on all of this in "All That Matters."
The problem with rallies like la
Wilson’s analysis is pretty compelling. One caveat I have is that Fed policy and interest rates are no longer one in the same. Many rates have moved far higher than the 150-175 FOMC tightening because of spread widening and anticipating Fed moves. For instance mortgages are +300 to cite one market. This is one adjustment that has already rippled through some markets- home builders are off quite a bit more than the stock market in general. Do home builders have more downside? Perhaps, but they may already be trying to form a bottom. It seems that we are seeing as much rotation in stock sectors as we are seeing direction now. There may be more downside in some sectors- especially late cycle ones like energy and materials. But in the not too distant future, we could see some early cycle sectors (thinking financials maybe) bottom and turn around sharply. The dollar index has also been strong- that would suggest that Fed policy is gaining traction. This could be a case of the cycle turning more quickly than folks anticipate. Stock market sells off in one final swoop, and Fed tightening cycle concluding in fairly short order. I expect we will see this play out in the second half of this year, and we shall see if this scenario plays out.
@RIA – some good points there. But so far, we’ve been seeing a lot of rotation versus total “get me out” selling of everything. We are all still acting as if the Fed has not abandoned their 2009-2021 playbook. To cite an obscure movie title, Things Change.
I’m of the same mind as RIA. I don’t know that we need to necessarily see a full-on capitulation at this point barring another significant negative shock. Seems to me like one of those situations where everyone’s waiting for that moment of panic that might never arrive and the market will have already left the station by the time everyone realizes it. That being said, if there is another inflationary shock, all bets are off and I fully expect pandemonium. Any other type of shock and we might get another dose of opiates and it’s off to the races.
Bad news is now just bad news. Good news remains bad news. We’re bereft of news-related aphorisms. We can still rest on “no news is good news,” though it’s cold comfort, because no news implies uncertainty and we all know how markets feel about that!