What a Week I Missed

Faithful readers might have (hopefully) noticed that I was away last week. I took my first trip outside the US since Covid, and my wife and I took full advantage of the favorable US dollar versus the Euro and Pound. 

There are few givens in life, but one of them is that something will happen whenever I spend a full week out of the office. I recently recounted the tale of my first overseas business trip, which turned out to be the prelude to the Crash of 1987. I won’t belabor all of the events that occurred while I was away, but last week certainly fit the bill.

I knew that I would be missing Election Day. I sent in my absentee ballot and awoke on Wednesday to find a generally surprising result. I figured that was the big event that I missed, especially when I saw US markets trade lower that day. Boy was I wrong. The question is now whether the bigger event was the market reaction to a weaker than expected CPI number on Thursday or the sudden implosion of FTX.

I side with FTX as being more important. This still unfolding situation confirms the worst fears of crypto skeptics. We won’t know the true fallout for months – if ever – but if you were hoping for cryptocurrencies to go mainstream, this does nothing to help your case. Ironically, the FTX story began to break while I was in the Eurostar waiting room as I was talking to a reporter who was working on a story about the one-year anniversary of bitcoin’s peak. For obvious reasons, that article took a much different turn.

So, let’s focus on stocks, shall we? While a market move of greater than two standard deviations is always an eye-catcher, ultimately I don’t see this being the start of a new market paradigm. A peak Fed Funds rate of 5% is not all that different from the previous assumption of 5.25%. The Fed may now be more judicious about the pace of rate hikes, but they are far from declaring victory in their fight against inflation. Bear in mind some other important factors. First, the plunge in rates was largely exacerbated by the fact that bond markets were closed on Friday for Veterans Day. That yields are higher today may reflect that. Second, a large portion of Thursday’s rally simply recouped a good piece of Wednesday’s drop.  

Third, and perhaps most importantly, it is not truly uncommon to see moves of this nature during bear markets. During the 2008-09 period, the S&P 500 Index (SPX) rose over 5% eight times. Only the last two were part of the actual bottoming process in March 2009. The others occurred with some regularity during September-November of 2008. We also saw 4 days when SPX rallied over 4% in the days leading up to the ultimate Covid low of March 23^rd, 2020. Indeed, while each of those bear markets ended with momentous rallies, not every rally proved to be the end of a bear market.   

Bear markets typically end with an event – either a U-turn in central bank or fiscal policy, or a climactic sell-off. I don’t think that the hope of a modest change in the pace of rate hikes qualifies, nor do I think that last Wednesday’s decline was truly climactic. We all welcome up days – imagine the difference in how we would have reacted to a down day of similar magnitude – but although last week’s rally was certainly a solid reaction to a potential slowdown in rate hikes, this doesn’t seem like THE rally. We already had to dismiss the ideas of both a Fed pivot and a Fed pause. It’s nice to know that they are likely to slow the pace of rate hikes, but it hardly seems like the sort of major event that marks a true market bottom.