As January comes to a close it’s clear that the winds have changed around equity markets. Last year was utterly void of any serious volatility, with the largest S&P 500 drawdown being ~5%.
As I type the S&P is already down 9.8% year-to-date, while the Nasdaq Composite (whose hugely weak breadth we’ve been flagging for months) is down 15.2% ytd.
That said, our economic assessment continues to reflect low recession risk. And it’s been our experience, and observation of history, that big bear markets mostly occur amid economic downturns. Of course we are very cognizant of the fact that 2020’s recession (shortest on record) and 3-week flash crash in stocks in all likelihood would have morphed into a protracted, painful period were it not for the trillions of dollars of stimulus brought to bear.
Now, with rising inflation having become the dominant topic of the times, and the view that the Fed is to be its slayer, well… let’s just say that the battle would occur within the walls of a somewhat thin stock market bubble.
“One story often advanced for the boom of 1928 and 1929 is that it was driven by the entry into the market of largely uninformed investors, who followed the fortunes of and invested in “favorite” stocks.
The result of this behavior would be a tendency for the favorite stocks’ prices to move together more than would be predicted by their shared fundamental economic values. The co-movement indeed increased significantly during the boom and was a signal characteristic of the tumultuous market of the early 1930s.
These results are thus consistent with the possibility that a fad or crowd psychology played a role in the rise of the market, its crash, and subsequent volatility.”
Has me thinking about the phenomenon epitomized by the recent rise of the Robin Hood trading app that captured the attention of stimulus check-wielding folks who found playing (in the likes of meme stocks and cryptocurrencies) in the market fun, easy, and, alas, addicting.
Well, I said “the rise” of Robin Hood. Here’s a look at the action in its stock since going public last summer:
