Good Tuesday AM,
Dan Rawitch shared some words of wisdom this AM: “While the market may be showing some slight signs of bottoming, I am not convinced that a bottom is in just yet. We have seen large banks and large countries recently liquidate bonds and this is not helping against the backdrop of Powell choosing to panic the market. The big news of the week will come on Friday when we see the Non-Farm Payroll numbers. I anticipate those numbers showing a softening in the labor market. If I am correct, we should see a nice bounce in bond prices. Meanwhile, I expect to see sideways movement. The caveat here is that we could see some news or a Fed Member could say the wrong thing and we will drop further.”
While the jobs report is always the most important news release of the month, right now, I am more worried about how the market reacts to the additional quantitative tightening the Fed is starting on 9/1. I am not speaking of raising rates, but that the Fed will buy less bonds and allow their portfolio to run off at 90b/month. Someone will have to step up and fill that gap of the additional 45b that the Fed is not going to buy. Banks and bond holders seem to be concerned as well, as they are selling bonds in advance, which is why we are seeing rates push higher in the wake of the stock sell off (rates should be improving). Greg Jensen, co-chief investment officer of Bridgewater Associates, is in that bear camp. In an interview with Bloomberg Television, he predicted that rate hikes will drive down both inflation and economic growth, sending asset markets to declines on the scale of 20% to 25%.
Wow… I would be careful in here especially in equities. Bonds should do better.
To add more color to volatility in the equity markets the WSJ shared, as stocks rallied over the summer and sank in recent days, a common force exacerbated the moves: the options market.
Federal Reserve Chairman Jerome Powell spooked investors Friday when he vowed the central bank would keep fighting inflation, even at the expense of economic growth. The S&P 500 suffered its biggest one-day loss in more than two months. The market’s summer rally, however, began fizzling a week earlier, coinciding with the Aug. 19 expiration of more than $2 trillion in options. Strategists say that left the market vulnerable to a spike in volatility—one that could feed upon itself if options market dynamics take hold. “Options are primarily an insurance market,” said Cem Karsan, founder and senior managing partner of Kai Volatility Advisors. “But insurance providers do not like to take directional risk; when they sell stock to stay ‘neutral’ to the market, it can create a circular effect.”
Finishing up with an interesting graph on house purchase demographics and how many homes were purchased as rentals. If you are thinking prices will dip for long, I am not so sure.
I would be buying the dip.
Please remain safe and healthy and make today great.