Making Sense
Little levity after a stressful week.
As I write this, markets have returned to where they closed a week ago and are poised for an upside breakout.
It’s been such an eventful and volatile week that it’s hard to believe we are back where we started.
If you’re wondering why we crashed in the first place, you should check out my piece about that here.
If you’re wondering what happens next, keep reading.
We See The Blood, Where Are The Bodies?
The strangest thing to me about this whole event so far is that we saw huge, illiquid swings in global markets that wiped out $6.4 TRILLION, but we have heard nothing about any firms or pod shops blowing up.
Just a few days later there’s no mention of it on the front page of the Financial Times.
VIX is back down in the 20 handle.
Everyone is ready to move on. Early in the week, I was actively calling for a quick recovery, but now that seems to be becoming a consensus. Consensus always worries me.
In past crises, it has sometimes taken months to fully understand the implications of the early cracks in markets.
The 1997-1998 Asian Financial Crisis began with a single bankruptcy in Thailand, eventually destabilizing the Thai Baht. A month later, that currency destabilization spread to other currencies.
The Long Term Capital Management implosion in 1998 resulted from losses suffered by Russia defaulting on its sovereign debt. The extent of LTCM’s losses wasn’t publicly known for a full month.
All week I’ve tended towards an optimistic reading of things. That’s proven wise in the short term, as markets have rallied off the lows.
Where we go from here is too uncertain to call. There could easily be an LTCM analog somewhere in the world quietly blowing up, and it’s impossible to prove there isn’t without some time passing.
That’s why, right now, I’m staying cautiously exposed to risk assets (I’m at 70% exposure, up from 50% at the end of last week) and refraining from the temptation to mash my entire portfolio into them. Buying loads of risk here is like betting a 4:1 favorite. Most of the time, you feel like a genius, but in the event that you don’t, it really hurts.
The Labor Market
Switching gears, let’s check in on US economic data. This week, we received some very reassuring jobs data that has largely erased the fear we ended with last Friday.
ISM Services data came in strong.
Jobless claims came in strong as well.
I want to talk about this excellent chart from
at The Monetary Frontier. I just started reading his work, and this particularly stood out to me.
This chart shows the weekly Initial Jobless Claims for every week going back to 1994. Blue means “low claims,” and red means “high claims.”
It’s notable just how consistently strong the job market has been the last 5+ years, except for covid.
Very difficult to look at this chart and see an imminent recession. There is, in fact, no hint of a softening in the job market.
Some Thoughts For The Weekend
There are a lot of reasons to be optimistic about the US economy. Don’t listen to the people who point to one large indicator (yield curve uninverting, unemployment trending upward) and tell you we are heading into a recession.
I wish it were as simple as that, but it isn’t. The economy is still reasonably strong, and it’s unclear what will happen.
I think we are a pretty big favorite to thread right down the middle in the most boring way possible from here. My base case is for jobs data and growth to chop along, slowing but not dramatically so. There likely won’t be contagion from the Yen situation. The Fed will cut more slowly than markets try to bully them into, but that will also be ok.
A low-inflation, slowly growing economy is about the best scenario for just owning stocks and looking away from your screen that anyone could come up with.
Of course, we have a lot of extra potential for volatility out there. That all needs to be monitored and managed. If it weren’t for volatility, this game would be way too easy.
Stay careful, don’t get greedy, and stick around. We’ll keep watching.
Good luck out there.
Disclaimer: The information provided here is for general informational purposes only. It is not intended as financial advice. I am not a financial advisor, nor am I qualified to provide financial guidance. Please consult with a professional financial advisor before making any investment decisions. This content is shared from my personal perspective and experience only, and should not be considered professional financial investment advice. Make your own informed decisions and do not rely solely on the information presented here.