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Market Outlook: Refining Mr. Market’s Forecasts With Macro Filter

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In late-August 2015, the US stock market tumbled sharply, unleashing a year of heightened volatility that seemed to anticipate the worst for the economy. But the volatility turned out to be a false alarm and equities rebounded, reaching new all-time highs in recent weeks. Mr. Market’s warning, in short, was a dud. In fact, the S&P 500’s various swoons over the past year turned out to be buying opportunities. That’s obvious now, but uncertainty reigned supreme in real time, at least from a markets-only perspective. By contrast, it’s useful to point out that Mr. Market’s tantrums were never verified by real-time monitoring of US macro risk. The lesson: filtering market volatility through a macro prism is essential for separating the signal from the noise.

Recall that on Sep. 1, 2015 I discussed the bearish warning that was bound up with the stock market’s tumble at the time. “Markets are pricing in the heightened probability of slower growth,” I noted. The following February, a markets-only view of recession risk pointed to a high probability that a new recession had started, as outlined here. But in that late-February analysis I also pointed out that “the hard economic data has yet to formally signal that a recession has started.” The macro trend did in fact slow, as shown by the weak GDP gains in this year’s first and second quarters. On that score, the market’s implied warning proved to be correct. But it’s also noteworthy that a formal recession signal was never confirmed by a broad measure of...


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