Updated: Sep 5
By Wilhelmina and Bernard at IntuitEcon
IntuitEcon will be posting weekly updates on our subscribers only page every week. Brain Trust members are welcome to contribute.
Strongest Bull market on record...
The S&P 500 continued to rise this week despite fears from the Delta variant and reductions in enhanced pandemic programs. The rise in this broad index since the crash last March has been unusually strong (slide 3). During the past decade the S&P 500 went through two other year plus stretches of largely uninterrupted gains including in 2013 and 2016. A common momentum indicator used to calculate the "Death Cross" shows the 50 day moving average (red) consistently above the 200 day (green), meaning that recent prices (blue) were consistently above those further in the past. What makes this bull market unusual is the gap between the 50 and 200 day moving averages. At yesterday’s close the 50 day was at 4,250 or 8.7% above the 200 day at 3,909. That gap has been pretty consistent since around September of 2020. No other nearly year long bull market has been this “technically” strong since SPY was first created on January 22nd, 1993.
Treasury bond yields continue to show less concern with inflation than earlier in the year despite higher than expected CPI readings last month. Corporate bond spreads continue to reflect little concern with default risk and fewer protections for lenders now than a decade ago. Leveraged loans have had a particularly good year, perhaps because flexible rates provide protection against rising rates and inflation generally.
The VIX did spike to above 22 earlier in the week, its highest close since May, but the jump was short lived with VIX back to around 17 by the close Friday. We view the falling VIX channel as a confirmation of the Call Option Bubble thesis published late last year and our prediction that as we moved past the pandemic, irrationally high premiums on these options would fall after the Tech crash in February.
The falling channel in the VIX is also analogous to that of falling corporate bond spreads and rising stock prices. Whatever the cause...its not the changing narrative because its been consistent since the crash at the start of the pandemic.
So what to do?
The steady increase in risk appetite supports our #2ndTechBubble thesis. Why? Because it shows that the driver is psychological ... disconnected from fundamentals. The magnitude of the 50 vs 200 day moving average gap for the S&P 500 stayed consistent through two waves of the pandemic, a challenged election, wide swings in earnings expectations, extreme moves in treasury yields, changes in Fed policy, changes in state and local unemployment benefits, wild swings in commodity prices, historically very large changes in fiscal policy (rivaling that of WWII) in terms of size relative to GDP...
...and through all of this, stock market momentum, corporate bond spreads, and the VIX kept ticking higher levels of risk appetite like clockwork. No one can know for sure why...but given that all the narratives mentioned have been changing it stands to reason that this unprecedented level of consistency in asset prices appreciation has little to do with fundamentals.
All the money created during the pandemic is slowly driving down the equilibrium expected return on financial assets. All the liquidity is preventing fundamental shocks from turning negative sentiments in the market into consistently falling prices. Straight lines don't persist in asset prices so we either get a crash or a blow off top at some point. Our money is banking on the ladder.
For the same reason why in my analysis of Delta coming out later today I concluded that there is room for optimism...
By Wilhelmina and Bernard at IntuitEcon
We will discuss this along with our Crypto podcast and Delta Risk analysis published today on our Sunday podcast. Everyone is free to listen in on Twitter although the reliability of this is not guaranteed. Subscribers are welcome to join by Zoom link will be sent out at 6pm EST. Recording starts promptly at 7pm. [UPDATED: Podcast now on Monday 6PM EST]
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