Is the Economy in a Serious Downturn?

Dear Traders,

Today, the market gapped down again and traded lower. Yesterday, it went down as low as 5% for QQQ, while reversing and closing almost green for all indexes. What a volatile time we are trading in! Brian and I traded a nice reversal around 10:15am ET on QQQ and IWM. You can watch our recap here.

For Tuesday Strategy, Peter is leading a discussion on the subject of how best to start your trading journey, including in the volatile market we are currently experiencing. I hope I will see you tonight in his webinar at 8pm ET. If you are not yet an Elite member, I encourage you to join with us. Here is a link to more information.

The global markets were certainly a mixed bag. Asia dropped 1.5% while the EU gained 0.6%. Crypto winter continues. Bitcoin’s volatile session yesterday, which saw its price briefly drop below $33,000 before recovering some ground, is spurring fears of a repeat of the 2018 “crypto winter” for digital assets. The sell off has been so bad that Elon Musk wants to convince McDonald’s to begin accepting Dogecoin!

The Fed has now commenced two days of meetings. Few people are expecting any changes in policy to arise from this two-day FOMC gathering. With inflation running, they need to raise rates and it appears very unlikely for them to hold off from a hike in March. Nonetheless, the Fed is not coming to the stock market’s rescue as it is perceived to have done in the past. But there is another factor at play here, beyond just elevated inflation. During past market downturns, there is usually some concern about the real economy itself. In the 2018 correction, there was a significant worry about both a slowing housing market and a slowing auto market. Back in 2015 and 2016, market volatility was associated with China. So, although it may have seemed in the past as though the Fed was rescuing the market, there was indeed a serious threat to growth and employment. Right now, even with the selling over the last two months, there is no big threat to growth out there. Yes, the Omicron wave will have negative repercussions for data in January and February, but economists largely expect growth to get back on track regardless.

I read in Bloomberg that all of this is evident in the credit markets. Whereas the 2018 dip saw a major increase in high yield credit spreads, the current correction has seen spreads remain extremely low. In fact, they were even higher a few months ago. Accordingly, elevated inflation makes the Fed less likely to pivot in its interest rate hiking path, because it wants inflation to go lower. But also, for the present, there is not a growth scare that is associated with this decline.

To your success,