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#Sahm Sparks Market Pandemonium
If there was a silver lining in an otherwise bad week for equities and risk sentiment, it was that bonds cushioned losses in balanced portfolios.
Investors learned in 2022 that you can't take a negative stock-bond return correlation for granted. Or that if you could for two decades, you can't anymore.
The assumption that stocks and bonds move opposite each other (or that stocks and yields move in the same direction) was regarded since ~2000 as for all intents and purposes inviolable. As a cons
Any thoughts on doing an educational series on the trading dynamics? The verbiage is included often and Googling terms/strategies don’t do it justice.
Sir,
I would make two suggestions. First, and easiest, is to go to Investopedia.com. They have an expansive and informative section which presents many hundreds of extended definitions of various terms, concepts and strategies. The material is clear and relatively easy to consume. If you want to dive much deeper I would recommend searching for H’s reprints of articles by Harley Bassman, especially his detailed discussions of convexity. The derivatives market is eight times bigger than the stock market or the bond market and nearly ten times the size of the annual GDP of the entire world. In this part of the financial markets all our financial fates are decided one way or the other. I got a doctorate in Finance in 1970, before most this stuff was even invented. Now it just scares the crap out of me. The most scary aspect is that no one really knows what will happen in another catastrophic situation that goes global. Good luck, sir.
Thanks for those stats, Lucky One. Many investors and commentators appear to be blissfully ignorant of this and continue to try to explain market action through the old prisms.
The AIG default rate swaps disaster back in 2008-2009 gave us a hint of the risks you mentioned at the end. At the core of it, he was just selling vol, wasn’t he?
I’ve been debating if big tech would hold up in the event that we go into recession and the rest of the market goes haywire. The assumption would be that they would benefit from being long duration plays. However, I’m starting to think the current pricing already has potential rate cuts priced in and we might not see these stocks rise when rates do start dropping. Similar to housing, I almost expect that pricing will buck historical precedent and potentially stay flat or drop even as rates decrease. Long duration bonds seem like the right play to me and I wouldn’t be surprised if they maintain their momentum in the coming weeks.
I hadn’t realized the Sahm Rule was only formulated in 2019. That means it has never been proven on “out-of-sample” recessions – unless you count the Covid/flash drop of 2020. Sahm doesn’t believe her rule actually works when UE rises due to a sudden increase in the labor force, at least so she says in her recent Op-Ed.
I also noticed that Nouriel Roubini, of all people, is saying the data don’t (yet?) suggest a hard landing. I don’t usually pay much attention to what pundits say, but it was weird to see “Dr. Doom” pushing back against, well, dooming. Has Roubini changed his stripes?