Beware the Calm: Unraveling the Hidden Dangers of Market Complacency and Economic Recessions
Risks Remain
I’m sensing a complacency in the markets right now that I don’t believe is healthy. The base case scenario seems to be that the economy will experience a soft landing, if there’s a recession at all. The cash markets are pricing in multiple rate cuts before the end of the year. The debt ceiling deadline could be less than three weeks away and both sides of the political aisle decided to postpone discussions until this coming week. The VIX is still at very comfortable levels. I think investors seem to believe that the ideal outcome will occur in each situation and I’m not sure that’s warranted.
Overall, I think the risk-off case is still building. Small-caps had another bad week. The S&P 500 was flat, but the equal-weight S&P 500 was down another 1%. Lumber hit 3-year lows and has one of the ugliest price charts you’ll see out there right now. Gold is hitting all-time highs. The only asset class that really hasn’t confirmed the bearish sentiment is Treasuries. Long bonds have struggled to generate gains thanks to persistent inflation even though the Fed has probably ended its rate hiking cycle. A lot of other signals - lumber/gold, utilities, small-cap/large-cap, staples/discretionary - are all flashing warning signs.
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