Hey Bond Market, Recession Brewing?

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Hey Bond Market, Recession Brewing?
geralt / Pixabay

In his Daily Market Notes report to investors, while commenting on a recession brewing, Louis Navellier wrote:

[soros]

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Someone needs to tell the bond market about the high inflation numbers. Stocks are acting like interest rates have spiked hard and that investors have recalculated stock valuations using much higher discount rates of future cash flows, which would punish all stocks, all else being equal, the higher the P/E the more the damage, but especially those companies with no current earnings.

Tech Struggles

The tech sector, which dominates the NASDAQ, has taken the lion share of the heat. Yesterday even the mega-tech names, which have strong current earnings, were also taken down as red ink spread across the board and people started to move to the sidelines to avoid the volatility.

Today is the ominous triple witching day with multiple levels of options expiring on the same day. The last several of these have resulted in down days as market makers rebalance their exposure and new positions are put in place. That has proven to be a reliable buying opportunity in short days that follow as the market has motored to new all time highs several times this year.

This time, however, there are two new powerful elements stirring the pot; tightening by the Fed, and the rise of Omicron on the pandemic front. The Fed’s move of accelerating tapering was well telegraphed and the Omicron news came out the day after Thanksgiving. Both arguably old news. Perhaps what’s unnerving market pundits the most is that while stocks are responding to Fed tightening which was done in response to surprisingly high inflation numbers which keep trending higher.

It all adds up except for one crucial thing: US Treasury interest rates have actually fallen since the Fed formally announce the tapering and intentions to raise Fed fund rates three times in 2022 and three more times in 2023. The quick answer is that US rates are still much higher than most of the rest of the developed world and foreigners are ready buyers, but that was the case before inflation spiked and the Fed tightened, a time when Treasury yields were noticeably higher.

Recession Brewing?

This disconnect needs to be resolved, for the simple answer is that bond market sees a recession brewing, which also doesn’t add up given the strength of the consumer, strong earnings forecasts and insider buying, and the likelihood of a robust, finally reopening global economy after the 2nd winter spike of the Pandemic plays out. It may very well be the case that when rates finally do rise, we will get a relief rally in stocks because things make more sense again and a possible recession signal has been removed. Expect this move sooner rather than later unless Omicron resets the end of the pandemic.

Coffee Beans

Engineers will fix the Golden Gate Bridge’s strange – some say eerie – humming sound in 2022, which was caused by reinforcement work to the bridge done in 2020 to stabilize it during strong winds. Thousands of U-shaped aluminum clips with rubber inserts will be added to the bridge to silence the hum. The repair will take 6 months and cost around $450,000. Source: UPI

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