A lower volume, lower velocity week relative to the fireworks of past month, and US equities scratched out a modest winner.
With a touch of distance from the screens, Goldman Sachs head of hedge fund coverage, Tony Pasquariello, lays out a set of high level observations:
i. a bullish thought: the US economy has clearly slowed, but as this week’s data set demonstrated, growth is not collapsing (as ever, the biggest judgement to make is whether to plan for a recession, or not -- see chart at bottom). in addition, the trading community has already shed a huge amount of length in US equities.
ii. a bearish thought: if the market is going to seriously contemplate recession risk for a while longer, the PE multiple will be under significant pressure (and is far from bottomed out -- witness 14x in late 2018). in addition, it’s not like everyone has culled their overweight in US equities (here I’m referring to structural holders of the asset class, particularly foreigners).
iii. irrespective of market bias, when you take a half step back, it’s stunning how much is going on right now... and, even if implied volatility has settled down, the market continues to metabolize a huge range of significant variables. the result is a trading environment that is profoundly different from the past few years, to say nothing of entire blocks of time (e.g. the secular stagnation era).
iv. what follows from that point: the post-GFC period was dominated by seemingly unbounded Fed policy, extraordinary US fiscal spending and unrivaled US tech preeminence. while I’m still a believer in the structural advantages of the US, that fact set has changed. my point here: the views and biases that one accrued in the past few cycles may not serve them well in the current cycle (again, I have the scars to prove it).
v. in addition, when you step back and monitor the daily flow of market commentary, you realize that a huge part of navigating the current environment comes down to game theory on what is between the ears of just a handful of people.
vi. in the end, whatever your market view, I’d remain very flexible on where this all leads. Here I’ll invoke the wisdom of Jesse Livermore: “when you are doing nothing, those speculators who feel they must trade day in and day out are laying the foundation for your next venture.”
