Too much market information blocks real-time trading patterns
Trying to use stock and bond signals to predict the economy is never easy. With all the wild swings in the markets these days, this is likely to become an exercise in nonsense.
Sometimes up, sometimes down, stock prices and yield curves are bouncing so much that it’s almost impossible to discern a macro message. Two gains and three declines for the S&P 500 this week left it down 6% on the year, but up 8% from its low. Which message to take into account? Bonds are also indefinite. The 2-year/10-year yield curve inverted and not inverted in the space of two weeks.
“The reality is that the signals in the market are making a lot of noise right now,” said Anik Sen, global head of equities at PineBridge Investments. “When you have a signal that’s not particularly clear, that range of results is very wide.”
Goldman Sachs Group Inc. research suggests that trying to discern a recession signal from stocks is generally futile. Mistakes are made, according to the study, by people looking for indications that do not exist. Stock markets behave the same 12 months before an economic downturn as they do at any other time, for example.
That’s bad news for investors who persist in looking for clues to help them navigate a growing list of known unknowns, from the Federal Reserve’s monetary policy path to war in Ukraine. All the uncertainty prompted Victoria Fernandez and her team to shorten their investment horizon to deal with ever-changing market narratives.
“The problem right now is that we don’t really know what’s going to happen. We don’t know what the revenue will look like. We don’t know exactly what the Fed is going to do,” said Fernandez, chief market strategist at Crossmark Global Investments. “Things seem to change every day.”
The changes are often drastic. Just consider: In January, bond traders were pricing the Fed’s benchmark rate at no more than 1% by the end of this year. Now they anticipate it at 2.5%.
A few months ago, a spike in Treasury yields was seen as a boost for financial stocks and a drag on utilities. This week, the opposite happened as investors shunned banks and sought safety in dividend-paying companies amid yet another rate hike.
In fast-moving markets, clear messages are rare.
Economically sensitive stocks like shipping companies and semiconductor makers have fallen this week, echoing warnings from Wall Street that recession risk is rising with the Fed poised to ramp up monetary tightening to curb the economy. galloping inflation.
Meanwhile, anxiety over a severe economic downturn seemed to be fading in the bond market. After the reversal in yields sparked paranoia last month, the spread between two-year and 10-year Treasury yields turned positive again.
“It’s too early to position for this full recession,” said Zachary Hill, head of portfolio management at Horizon Investments. “But it’s time to reduce some of the risk a bit.”
While the two-year/10-year curve reversed before the previous nine recessions, it was not helpful in calling the inflection point. The time between reversals and recessions has varied widely – from seven months to about four years, according to data compiled by Goldman.
A strategy that bails out equities on reversals in returns would miss huge gains. According to the Goldman study, stocks rose over the next 12 months after reversing two-thirds of the time since 1965, with the S&P 500 climbing a median of 9% over the period.
On the other hand, using the movement of the S&P 500 to discern the direction of the economy can be dangerous. Stocks react to all kinds of news, often in exaggerated ways. Many sales may just be false alarms.
By comparing the distribution pattern of S&P 500 returns through different phases of a recession cycle, Goldman found that market performance a year before an economic downturn is no different than it is in a recession. other times. It is only at the start of a recession that equities tend to post consistently lower returns.
“Equities often perform well in bear markets, correct sharply early on and can recover quickly if macroeconomic conditions improve,” Goldman strategists, including Christian Mueller-Glissmann, wrote in a note. “Recessions are hard to predict.
And the markets this year have been particularly difficult to read, given all the sudden price reversals. That left many investors puzzled, according to Arthur Hogan, chief market strategist at National Securities Corp.
“That’s why people are saying ‘hey, this market doesn’t make sense right now. So we’re taking a step back,'” Hogan said. “The market is acting out of character.”