FOMO!

What a bounce back we saw this week. The US Equity Indices registered one of their best weeks of the year, from trough to close. Every broad market index is now about its respective 50-day MA.

It’s almost like the momentous drawdown that we saw two weeks ago, didn’t even happen. The Vix has been selling off and has settled back down to relatively acceptable levels and with that the market has defied all expectations, rallying to the upside.

The whole narrative surrounding a hard landing has quietened down. As the market prices in a soft landing once again, we’re seeing the lack of fear take over.

Globally as well, data has come in better than expected. Japan reported a much higher-than-expected level of GDP growth, driven by consumption - exactly what they’ve been looking for. And the UK also delivered stable GDP growth and a deceleration in inflation data.

It would seem celebrations are warranted.

The only cause for concern on investors’ minds right now, is likely geopolitical risk. We can see the risk premium still being priced in crude oil and gold. You can see this in the chart for Crude Oil below. I took out data for the year 2020 because the negative WTI price distorts the chart.

Crude inventory is still marginal and while global growth slowdown fears have subsided, data from China is still lagging. Industrial production and fixed investment in China continue to fall, suggesting we may not see the pre-pandemic level of demand return just yet. Nevertheless, oil prices remain above what should be its fair value, mainly due to the uncertainty that persists with Russia-Ukraine and the Middle East.

A few big events next week - the Jackson Hole symposium for Central Bankers (Aug 22-24). Everyone will be extremely focused on what Chair Powell has to say on Friday, Aug 24 at 10 am ET. However, unless he explicitly talks about holding off on rate cuts in September, I doubt the market will care much.

On the macro front, we will get the Flash PMI - something everyone will be watching for clues about activity slowdown, a weaker labor market, and any signs of inflation returning.

Macro - US Growth

US Growth is slowing, albeit not the way everyone predicted. This was the biggest perceived threat to global growth. However, for the second half, global growth is now projected to come out better than expected and the global growth is expected to be 2.4% for 2024 (Citi Group Forecasts), which is only a modest slowdown from 2.7% in 2023.

The major tailwind will continue to remain the US, while the biggest drag is shaping up to come from China, and then the EA.

The threats of a hard landing for the US were seemingly unfounded, and calls for an imminent recession seem to be unwarranted.

Consumption continues to remain strong for the US, which is in a way, contradictory to what we want to see for inflation numbers. Nevertheless, we’ve often discussed a K-shaped economy and we continue to see the average and low-income consumers struggle, while spending is led by the higher-income group.

The biggest driver of GDP growth throughout 2023 was government spending. This was not just in the US but, also something we’ve witnessed in quite a few other countries - including India, and to a certain extent China. While that has not gone away, there is somewhat of a slowdown in pace and that’s also what is weighing on GDP growth.

After the Monday drawdown, which followed the US Labor Market data on Friday, Goldman Sachs increased their probability of a recession to 25%. Now, they’ve reduced that probability to 20%. I find great value in the research that comes out of GS and I fully appreciate that we need to update our views as the data evolves but, I thought the first call was a bit hasty.

In all honestly, with the way rates have been increased, it shouldn’t surprise anyone if there is a recession. In fact, what’s happening right now, is far more of a surprise. The resilience of US growth is definitely not what anyone expected, in theory. But here we are.

If the Fed cuts in September, we will have achieved the elusive soft landing! What a time to be alive!

Closing Thoughts - FOMO!

After the rally that we’ve seen in the last two weeks, it’s hard to think that the market will see a drawdown again. Summer is always a period of low liquidity, and what we saw was a perfect storm of events that led to a sell-off that was even more severe than anyone would’ve reasonably expected. With selloffs like that, and at a time of weak liquidity, you don’t expect to see the rally that we did. While it smells very much like a… bear market rally, I can’t help but wonder whether I was wrong to “not buy the dip”. That’s the thing with strong counter-trend rallies - they make even the best analysts question themselves.

The funny thing is, that Monday when the market felt like it was crashing - I didn’t panic at all because I kind of knew exactly what was happening. But right now, I’m experiencing serious FOMO and wondering whether that was just a glitch in the matrix and if all is well with the world again.

One thing I do know is that everything that created the perfect storm has not gone away completely and this is a market that is tied to narratives now. The macro data was never that weak to warrant the kind of drawdown that we witnessed. Yet, the narrative made it so.

I don’t foresee another crash but, I did expect a selloff to persist. I still do to a large extent but, I can’t help but feel a certain level of mea culpa for maybe missing the dip.

Have a great week ahead!

None of the above is investment advice. Please visit www.macrovisor.com/disclaimer for the full disclaimer.