A Market Correction Doesn't Always Mean Real Stress
Just sometimes
Yesterday, I posted some brief thoughts on the recent Nasdaq correction:
Like the other two drops that we’ve had in the last year since the COVID crisis, even though the market took a quick dive it didn’t really mean much and is somewhat normal. This was the worst of the three recent dips in terms of relative strength but it didn’t even reach oversold levels:
And it barely registered on the VIX:
Like the other two drops, the TED spread stress indicator didn’t even budge. This is unlike what we saw for both drops in 2018 and especially COVID, suggesting further that the recent dip is more noise than any kind of real signal (thus far):
On the interest rate side, the furious comeback in inflation expectations points to a healthier economic picture (in my opinion). If we were seeing declining expectations, we could take another potential downturn seriously. We are far from that:
Furthermore, the yield curve continues to invert, which is exactly the kind of behavior we would expect to see in the early stages of a new economic cycle post recession trough:
Overall, we should expect market pullbacks even when general conditions are improving. It’s never a smooth ride. As of now, unless some new information or developments occur, the metrics for a continued recovery appear favorable. If I had to bet, it would be on more upside rather than downside, though that will forever be a tricky ask as to how exactly that will translate into market performance.
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