Hot Data And Tepper’s ‘Short’ Call

“Stocks slump as bearish Tepper amplifies hot data,” one Thursday headline said.

I suppose this goes without saying, but it’d be foolish to read too much into the price action given the proximity of the Christmas holiday. Big holidays beget illiquid markets, and illiquid markets are subject to volatility. Remember: Market depth and volatility are inversely correlated.

Of course, market depth never recovered fully from the implosion of the VIX ETN complex on Jerome Powell’s first day in the big seat back in early 2018. Impaired liquidity is endemic to modern markets, ironic given the extent to which the HFT lobby and buy-side quants are inclined to extol the virtues of mechanized everything.

Certainly, surprise upward revisions to the third estimate of Q3 GDP (the “hot data”) didn’t help stocks’ cause. It was good news of the worst kind: It argued for a resilient US consumer, prone to more spending on services. So, spending where the inflation is, if you will. From the perspective of “sticky” price growth, the figures were disconcerting, but I doubt the revisions were worth ~4% on the Nasdaq and ~3% on the S&P near the lows — that seemed like an overreaction, but again, that’s what thin markets do.

As for the David Tepper factor, I guess his remarks were worth mentioning. He spoke to CNBC, as is his occasional wont. Essentially, Tepper recapped the recent easing in financial conditions, noting that it likely wasn’t welcome at the Fed in the context of the inflation fight. He broke no new ground in that regard whatsoever. I’ll recycle the annotated chart (below) which will be familiar to regular readers.

The first annotation shows the easing in financial conditions in and around the July FOMC meeting and a relatively cool CPI report. The second annotation shows the tightening that accompanied Powell’s terse Jackson Hole speech and the hawkish September FOMC meeting. And the third annotation shows the FCI easing impulse that played out with the help of an October/November equity rally, the dollar’s steep pullback last month and the associated drop in 10-year US yields.

“They tell me what they want to do, and they know all this stuff the other people do,” Tepper said, of central banks and those who argue that recent inflation data suggests scope for less aggressive tightening in early 2023. “They’re worried about this underlying mismatch in the labor market. They don’t want inflation to take hold and you don’t want a steady state where you have 4% — they want inflation at 2%,” he went on to muse, noting that it’s not just the Fed who’s concerned, but also the Bank of England, the ECB and developed market policymakers in general.

The upshot: Tepper thinks policy will err on the side of tightening in 2023, and that’s not necessarily conducive to across-the-board gains for risk assets. But he was hardly peddling doom. He was barely bearish.

“Look, you’re supposed to always hold stocks and look through these things and look [at] the long-term to a certain extent,” he said, in response to a question from Becky Quick, who jokingly wondered if, given all the ambiguity, Tepper might “just close up shop.”

If you actually listened to Tepper’s interview, he suggested that for most investors, the common sense thing to do is simply be “less long.” The “average person,” he reminded CNBC, shouldn’t be “moving around.” Tepper’s ostensible bearishness thus needed to be put in context. Here’s that context: “For me, as a hedge fund manager, I’m gonna lean short.”

Suffice to say not everyone’s a hedge fund manager, despite what you’d be inclined to believe if you frequent “finance Twitter,” where seemingly every other netizen claims to be “ex-Goldman” or “ex-Bridgewater.”

Tepper was more adamant with regard to bonds. On stocks, though, he cited his generally optimistic demeanor in explaining why he’s merely “leaning” short. “I think the upside-downside just doesn’t make sense to me when I have so many central banks telling me what they’re gonna do.”