Juggling Dynamite

As we await the next rate hike from the US Fed, some big picture is worth considering.

As shown below, courtesy of Charlie Bilello, year to date has been the most negative start for stocks (S&P 500) and bonds (aggregate index of investment-grade bonds) together since at least 1976, and the first time that both have lost more than 10% at the same time. Moreover, while the -11% decline for bonds (yellow below) has already been the worst on record, it bears mentioning that the -13% for large-cap stocks (blue line) is just a fraction of the total index drawdown seen in the recessions and bear markets of 2020, 2007-9, 2000-02 and 1987-88. Beyond the broad S&P benchmark, 45% of NASDAQ 100 stocks are already off more than 50%, which only happened as part of the larger-than-historically-average bear markets of  2000-02 and 2008-09.

The last eight times the S&P 500 was down in a calendar year, bonds finished the year up as higher interest rates slowed consumption and inflation.  The question is: will this time be different?

So far, the University of Michigan’s April consumer sentiment poll found the percentage of households still bullish on the stock market at a high 56.6% and those bullish on bonds tied for an all-time low of just 3% (Rosenberg Research).  At the same time, cash levels and personal savings as a percentage of disposable income (on the left since 2005, courtesy of The Daily Shot) have fallen back to pre-pandemic lows.  The liquidity crunch and capitulation selling for ‘weak hands’ has barely begun.  And they’re not holding bonds.

Danielle DiMartino Booth, founder and CEO of Quill Intelligence, joins Jack Farley and former senior Fed trader Joseph Wang to share her outlook on this week’s FOMC meeting. Booth argues that the Federal Reserve’s lateness to fight inflation has caused it to lose a lot more credibility, and makes the case that it risks to lose even more credibility if it fails to recognize that the economy is slowing rapidly. Booth notes that credit spreads are widening rapidly and argues that it will be a credit market blow-up, not an equity market drawdown, that forces the Federal Reserve to change course.

Wang and Booth discuss how rising mortgage rates will deter the Fed from shrinking its holdings of mortgage-backed securities (MBS), and they each give their take on the continued sell-off in Treasury bonds.  Here is a direct video link.

On today’s edition of “Boiler Room,” Alfonso Peccatiello is joined by Eric Basmajian, founder of EPB Macro Research. With a focus on cyclical and secular cycles in the economy, Eric joins the show for a deep dive into the housing market. He shares with listeners the indicators that allowed him to foresee the slowdown in economic growth that most investors are just now beginning to price into markets. Here is a direct video link.