Stocks and bonds are falling like we're already in a recession.

We’ve said many times before that the economy and the stock market are not the same thing. In fact, they are often very very different things.

The average investor will often fail to make this differential. The economy tends to have an overriding effect on sentiment, and this often means the stock markets suffer, even when earnings and corporate performance are thriving.

One thing they do both have in common is that over time, they both grow.

At present, in the US, the disjunction between the two seems extreme. We always focus on the data and not emotions. Last month saw both a blowout number for third-quarter gross domestic product growth of 4.9%, and a selloff in the stock market that brought the S&P 500 more than 10% below its recent peak — satisfying a popular definition of a “correction.”

The big question for stocks is whether the bear market is over. If it is, it is a good buying opportunity, but if not then you should take the chance to sell. We realise this isn’t very helpful, but the answer lies in a question about the economy: Is there going to be a recession in the US?

So far this year, stocks and bonds have in general sold off again. Last year was one of the worst on record for the price of bonds and stocks moving together. It has brought about a lot of discussion as to whether the 60/40 stock/bond wealth management model is broken.

With the rise in interest rates that we’ve seen, the fall in bond prices must be near an end…….probably.

According to Robin Brooks of the Institute of International Finance, the best explanation for rising yields is “that the US did NOT go into recession after SVB blew up. That meant — relative to bearish consensus — data kept surprising positively, which forced the yield curve to uninvert.” He illustrated this with Bloomberg data in this chart:

This shows that expectations are wrong due to emotion and sentiment, which in turn leads to upside surprises.

Markets have capitulated on their belief in an imminent recession under the weight of a welter of positive data. That’s been bad news for bonds. The implications for stocks are more nuanced, but in general there are precious few examples from history of a bull market starting other than when there is already a recession. That implies we should expect the bear market to continue if a recession really is ahead.

You could argue that bonds and stocks have in fact moved as if recession is already upon us. The point that has skewed equity markets this year making them look more positive than they have been, is the heavy weighting towards big tech in the US. The S&P 500 is still positive YTD, but ONLY because of the performance of Alphabet, Amazon, Microsoft, Meta and Nvidia.

The equal-weighted version of the S&P, in which every company accounts for only 0.2% of the index, is actually down on the year so far and currently very near its lows.

Nicholas Colas of DataTrek Research points out that Friday’s closing level of the S&P 500, of 3,839.5, is drastically at variance with the current estimates from Wall Street analysts, many of whom moved up their year-end targets for the benchmark during the summer when the market was rallying. He explains as follows:

One simple metric we’ve used over the years to know when fundamentals have diverged materially from market sentiment is the difference between analysts’ aggregate S&P 500 price targets and current prices. When the Street thinks the S&P should be 20% or higher than where it is actually trading, something has gone wrong. According to FactSet, analysts’ current price targets on the index bubble up to 5,082. We are 23 per cent away from that number today. Either the Street’s estimates and price targets are way too high, or markets are excessively bearish. We’ve seen things break either way (stocks higher or lower three months later) whenever this happens.

For indications that the market is indeed bearish, and possibly excessively so, the highly economically sensitive transport stocks are in a tailspin:

On the face of it, after a performance like this, we should brace for a trading bounce or a recession — or both. This chart would also imply that we aren’t far from pricing in that recession, yet GPD for the last quarter came out at 4.9%, the highest in 2 years which was after the pandemic boost!

The fact is, contrary to popular belief, the numbers for the economy are good. YET stocks are moving in the other direction. It could be that everyone is expecting something to break, but what if it doesn’t?

We have been expecting something to break all year, then we had SVB and expectations were for the problem to spread, but maybe that was it – it’s been and gone. Only time will tell on that front.

We hear from Jerome Powell and the Federal Open Market Committee this week but barring a major surprise, there will be no rise in interest rates, meaning that the central bank will have been on “pause” since July. It’s hard to imagine that Powell will renounce the option of hiking again, however, because inflation is not under sufficient control for him to do so.

Last week saw the release of Personal Consumption Expenditure deflator data for September, the Fed’s favoured measure of inflation. If we look at two popular measures of underlying or core inflation — a straightforward “core” that excludes food and fuel, and a “trimmed mean” produced by the Dallas Fed that excludes the outliers and averages the rest — we find that both are decreasing but remain above the Fed’s comfort zone. Fed governors tend to be judged by their record in containing inflation, and that will make them hugely reluctant to claim victory just yet:

Leader Board - Top Trading Strategy

While still on the high side, it’s hard to argue that it isn’t heading in the right direction.

What happens next is actually very hard to call. The fact that most of Wall Street increased their expectations in the summer, only to see stocks fall fast almost straight after, never fills us with confidence. Wall Street analysts and investment banks almost never seem to be right, and if they don’t know, what hope is there for the rest of the investment world?

The one thing we always say, is look at the data, not the noise around it. The data right now, looks good. Most corporates who have announced earnings, have added a note of caution about the economic outlook, but then they always do. It is much better to say the outlook is bleak and be a hero when it all turns out well than to say you’re going to smash it, and disappoint.

This is surely just human nature. We always expect the worst, but it doesn’t always come.

Closing Comments:

Regardless of where the economy (or markets) go from here, we hope that we'll take advantage at TPP.?

Last week was another poor week for global equities and investors. However, something interesting has been happening on the TPP platform over the last few trading days.

We've referenced before that many of our strategies?have been beating market performance this year by 'buying the dip' and then 2 weeks ago- many strategies switched to the SELL side and made profits as markets fell.

Well......

Last week many of the short sell trades were closed in profit and as the week progressed we?witnessed another interesting evolution on the TPP portfolios. Yet again- they're buying the dip.

Many of the 'short sell' trades have been covered and profits taken. This volatility really is creating opportunities at the moment.

The current situation in this region is horrible to watch, but our traders are tasked with beating markets and managing risks, and if this bias assists with that- our clients will be happy.

We hope that by building products like TPP that investors will see there are investment solutions out there that can perform regardless of the investment climate.

Why merely track a market, when?opportunities can be taken advantage of in the short and mid term?

Adding small short SELL positions?as the markets fall?is one of many ways our strategies make modifications to?consistently beat the markets.

If you're frustrated with what many?believe is a stale and outdated wealth management model- then consider arranging a call with our team.

We are also of the opinion that the industry needs revamped, and that wealth and asset managers have no excuses for failing to beat their benchmarks most years.

Investors want more than 4, 5, or?6% per annum, without taking on excessive risk.

Investors are frustrated with the poor performance and excessive fees.

Ladies/Gents - this is the very reason why we built TPP.

TPP has been built for frustrated investors globally. It's time to empower yourself, and start to beat your benchmark. At TPP we offer a multitude of different strategies and trading techniques- they all have one thing in common. They are all designed to beat their market benchmark. Their track records suggest they will do exactly that.? It's time for change. No more exposure to underperforming?funds, and their inflated fees.

TPP has been built to disrupt the market place and offer investors the solution they've been craving. Welcome to the future of investing.???