Weekly Market Summary

Summary:  Equities fell 20% from their September high into Christmas Eve. Since then, they have rallied almost 8%. While this is encouraging, there were two similar rallies, at the start of November and December, that both fizzled out. What is different this time?

For one, there have been two massive accumulation days in the past week. Second, outflows from risk-seeking equity and credit funds and into safe assets has become the most extreme, by far, in the past 10 years. Third, the volatility index spike on Christmas Eve matches those near the lows in SPX following every major sell off since 2010. Fourth, the valuation de-rating is now the largest outside of a recession since 1994.

Nonetheless, when SPX drops 15-20% or more, it has a strong tendency to retest those lows in the weeks/months ahead.

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2018 ended with a thump. NDX lost 1%, SPX lost 6%, small caps lost 12% and financials (the consensus favorite a year ago) lost 15%.  Treasury bonds also dropped for the year, as did commodities. The only winner in 2018 was volatility (table from alphatrends.net).  Enlarge any chart by clicking on it.

January Macro Update: 2018 Employment Was The Second Best Since 2000

Summary: The macro economic story has started to change. The data from the past month continues to mostly point to positive growth, but there is a very important exception: weakness in housing is apparent. If this persists and other measures, especially employment, start to also weaken, a recession in 2019 is possible.

For now, the bond market sees continued growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 8 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.

Market Watch: Top 50 Finance Twitter Accounts for Investors to Follow in 2019

Many thanks to the people at MarketWatch for including us on their list of the Top 50 Finance Twitter Accounts for Investors to Follow in 2019. The full list is here.

Weekly Market Summary

Summary:  Emerging markets are in a bear market. Europe and the Nasdaq are getting close. After falling 10% in October, SPX has been unable to sustain a rally. Even bearish sentiment, washed out breadth and the prospect of Santa Claus can't seem to rally stocks.

In real time, corrections always feel like they are the end of the bull market: the price pattern is bearish and the news emphasizes stories about a likely recession, poor forward earnings and geopolitical risks. Yet corrections usually happen every 18 months, and the current one has so far not been especially long or deep.

That is not to suggest that investors be complacent or dismissive of mounting risk. SPX had formed a topping pattern in August, and events since then have only strengthened this pattern. But there is little evidence of the underlying stress that is normally associated with big problems. For all the recent volatility, it is worth noting that the low in SPX was in October, 6 weeks ago. Everything since then has been a hot mess.

This is not a market trying to efficiently discount next year's growth; it's a market mostly driven by fear and emotion.

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The correction from the September all-time high (ATH) is now in its 11th week. Aside from the NDX, all the US indices are now negative for the year. So are treasuries (TLT). What's worked well so far in 2018? Volatility, which is up more than 40% (table from alphatrends.net).  Enlarge any chart by clicking on it.

December Macro Update: Recession Risk Low, But Starting To Rise

Summary: The macro economic story is starting to change. The data from the past month continues to mostly point to positive growth, but there is a very important exception: weakness in housing is apparent. If this persists and other measures, especially employment, start to also weaken, a recession in 2019 is possible.

For now, the bond market sees continued growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least 8 months and in several instances as long as 2-3 years. On this basis, the current expansion will likely last into mid-2019 at a minimum. Enlarge any image by clicking on it.