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Behind The Scenes Of August’s ‘Wall Street Whiplash’
Everybody's astounded by the rapidity of the market recovery from the August 2-August 5 growth scare and accompanying vol shock.
Certainly, the dizzying reversal constitutes a marvel, particularly to the uninitiated. If you're the financial press, it makes for good headlines.
When and where possible, I try to avoid suggesting the vast (vast) majority of investors have no hope whatever of coming to terms with what's actually driving the price action, but... well, it is what it is. And what it i
Thanks. Officially above my pay grade. Read but not totally understood.
What you said!
Clear. succinct. Thank you.
This is part of the value of your report.
Also:
“…somewhere in a cookbook there’s a recipe for disaster. The ingredients are leverage and smart people.”
Or
“If there’s anything more dangerous than smart people with leverage (and I’m not sure there is) it’s probably dumb people with leverage.”
And you get it with a side order of humor. Very dry. Like a good martini (sorry I know you don’t partake).
This for 6 and 2/3 dollars per month.
My apologies to the rest of the audience, but you need to raise your prices.
US is clearly not in recession (regardless of the Sahm Rule trigger, Sahm herself says so). Some aspects of the economy are slowing, but the 800 lb consumer spending gorilla is still doing gorilla things. Inflation is back on the disinflation path. The Federal Reserve will start cutting rates in a month, and the slowing parts of the economy include things that usually respond well to lower rates. If the market falls on a mere 25 bp in September, that dip will be snatched up in a eyeblink. Iran has been threatening retaliation against Israel for weeks so no surprise to come from there. As for earnings, with 2Q essentially in the books, I’m reading:
“The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rates for the S&P 500 for Q2 2024 is 10.8%. If 10.8% is the actual growth rate for the quarter, it will mark the largest earnings growth rate reported by the index since Q4 2021 (31.4%). Given the growth in earnings, what is the S&P 500 reporting for revenue growth for Q2?
The blended (year-over-year) revenue growth rate for the S&P 500 for Q2 2024 is 5.2%. This growth rate is below the 5-year average revenue growth rate of 6.7% but above the 10-year average revenue growth rate of 5.1%.
However, if 5.2% is the actual revenue growth rate for the quarter, it will mark largest revenue growth rate reported by the index since Q4 2022 (5.4%).” [Citation: Factset]
Thanks, your fundamental commentary is always a nice complement to our host’s modern market plumbing’s articles.
You follow Sahm on X? She was indeed pretty clear in her prediction, though I thought some economists weren’t kind – “if a rule has to be interpreted, it isn’t a rule” – as if anything in macro economy was constant or certain…
Re. earnings, the elephant is NVDA on the 28th… That’s going to be a catalyst if they deviate much from expectations…
I do follow her on X but don’t go to X much anymore.
My feeling is that we underestimate what a huge and strange shock was Covid, on every aspect of the economy and society, so we overestimate how well economic indicators and models should work, and even now the knock-on effects of the shock are still distorting things.
When you take 8 MM (my est) out of the workforce, cut off immigrant labor, and inject $8 TR of stimulus, all in less than a year, it makes sense that the labor market will get very distorted. An ultra-low UE rate, surging wages, rising unionization, boom in openings, labor hoarding, etc. Then as things return to “normal”-ish, it makes sense that those distortions will reverse. UE rises, wage growth slows, union trend weakens, falling openings, more firings.
Anyway, the US seems closer to a recession than it was, but closer can still mean some significant distance.
Short VIX ETNs are flawed by design. They must rebalance after a spike and reduce their short exposure to keep constant factor exposure. As a result, they fail to re-capture their original delta losses as vol comes down again. Essentially, they compound losses. For an illustration pull up a one month chart of SVIX, SVXY. People drawn to such products should seriously consider if shorting vol is what they should be doing…
Great point. They are obliged to hedge rather than fade large moves.
What software/website do you use to produce your AI generated header image of each article? They are amazing each time…
I use several, but I also use Photoshop to tweak them and enhance them once I get something I like. But the key is that it all depends on the prompt and how much effort you’re willing to put it when it comes to explaining to the AI what it is you’re trying to show. You have to talk to it and give it feedback and so on. They’re getting a lot better, really fast, but it still depends on the human imagination. So, “Wide-aspect ratio illustration of a grizzly bear chasing a robot riding a bull through the city, low-angle.” Then there was a lot of “Remove this,” “Remove that” and so on. Then I still had to take it into Photoshop and add the lens flare, and enhance the lighting on the bear’s fur, etc. If you want it to look professional, there’s some effort involved. Not as much as last year (when the AIs weren’t as advanced), but still a considerable amount. And they still have a very hard time with human faces if you’re trying to generate, for example, a crowd of people. They also have a hard time with human hands and just a lot of other stuff too. Crucially, they can’t really “see” what they draw. So let’s say you go in and you select an element that shouldn’t be there and tell them to remove it, they can see the selection but not the element itself. That can create problems. There’s more to it than you think, and it’s not free by the way.
You have so many great images, but I really liked this one. Someone beat me to complementing you but I’m glad they did so as it was interesting to read your response on the current ‘state of the art’ so to speak.
BTW – I’m one of the people who got schooled the past two weeks front running a pullback with “leverage” (i.e., SPY Puts). Some of them are lost money but some are more than a month out so I may be okay. It would have been so much better if I just BTFD. Your articles (hopefully) help me better understand (a little bit) what’s going on.
Maybe this is all there is to it, but I’d love to see a deeper dive into the world of leveraged ETFs and their potential impacts on the market. This class of “assets” does seem like something to keep an eye on for potential broader market implications.
If you have a long enough time horizon, I’d imagine you could take the passive investing to it’s logical extreme and leverage up, but I assume there would be some extinction events that could come along and wipe you out if you just buy and hold a leveraged index ETF.