Meaning people tend to reframe their thoughts to fit the market.<\/p>\n
But on a deeper level, it’s about a blind spot in investor behavior – confirmation bias.<\/p>\n
And it clearly appeared in most media outlets after Wednesday’s 4% wash out.<\/p>\n
You see, bears do<\/em> live lower…<\/p>\n Because after that market rout, commentators casually passed around the word “recession”<\/em> as if it were just another water cooler topic… with the usual feigning looks of concern I’m sure they practiced in the mirror more than once.<\/p>\n Some were even certain of it.<\/p>\n Yet, the leading economists from the big banks all differ on whether we’re heading there.<\/p>\n So, if the people who are actually in charge of investor capital and manage large research teams aren’t sure yet – why would the media be?<\/p>\n It’s because recent volatility – combined with the big one-day downturn – fits nicely with a bad word like “recession” and makes for fitting headlines.<\/p>\n It’s important to get this right… because the media can get into people’s heads quite easily.<\/p>\n And once they plant that seed, it could become a self-fulfilling prophecy.<\/p>\n I’m not saying we can’t go into a recession. There’s plenty of reasons why we can.<\/p>\n For one, the higher cost of living is very tangible these days. And the wealth effect from last year’s crypto gains and absurdly high-priced market is all gone. <\/p>\n But a lot of commentators are too quick to jump on that bandwagon… which looks suspicious after a big one-day rout in the market.<\/p>\n In Tuesday’s essay<\/a> regarding the S&P 500’s price action, I wrote…<\/p>\n It’ll likely begin oscillating up and down between 3900-4200 for a while. The only thing that’ll get us out of this range is reconciliation on the economy… The Fed will either engineer a soft landing, the economy re-gains (at least) part of its growth rate, and analysts start upgrading earnings projections.<\/p>\n Or a recession will be imminent.<\/p>\n That’ll take at least a couple of months to resolve.<\/p>\n There won’t be enough information until then<\/em>.<\/p>\n<\/blockquote>\n And there still isn’t<\/em>.<\/p>\n So, why the premature fear-mongering?<\/p>\n Well, confirmation bias occurs when we only use selective evidence to support our beliefs but disregard anything contradictory.<\/p>\n In this case, a freefalling market with a deflating COVID tech bubble fits nicely with the idea of a recession. Even though there are plenty of data points that can be used to support the opposite view.<\/p>\n Like the fact that gross domestic product (GDP) is mostly driven by consumer spending, and retail sales have been holding up.<\/p>\n As have other measures of economic activity, like the ISM Services PMI… an index measuring business activity in the services sector of the economy. When it reads above the 50% level, it indicates an economic expansion. A reading below 50% indicates a decline in the non-manufacturing economy. It’s currently at 57.1%… still a positive sign, although off its highs.<\/p>\n Even if we do find ourselves in a recession… who’s to say it hasn’t been priced into the market already?<\/p>\n We’ve mentioned several times that the price-to-earnings (P\/E)<\/a> multiple for the entire S&P 500 Index (a broad measure of valuation) would fall to its long-run average…<\/p>\n And it has.<\/p>\n Now tech stocks have followed suit, trading at their long-run average.<\/p>\n The point is, prices have already<\/em> fallen.<\/p>\n Here at Market Minute<\/em>, we first started thinking about recession back on February 8<\/a>, saying…<\/p>\n So how do we make sense of inflation expectations dropping while commodities are rising faster than last year?<\/p>\n Well, it could come down to one of the ugliest words in economics – recession.<\/p>\n<\/blockquote>\n But there is still no certainty.<\/p>\n Recessions happen when people start losing their jobs.<\/p>\n And right now, jobless claims are still way below trend. Take a look at this chart…<\/p>\n Lately, it’s been picking up. But not enough to confirm anything.<\/p>\n To know when the alarm bells should start going off, I’d point you to November 2007. That’s when jobless claims breached their trend – a warning sign to the market – almost a full year before the credit crisis brought the market to its knees.<\/p>\n But right now it’s too early to panic, and all this market is doing is simply adjusting to the froth of 2021.<\/p>\n Free Trading Resources<\/strong><\/p>\n Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career \u2013 at zero cost to you. Just click here<\/a> to check it out.<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n This recent fallout could be the market testing the bottom end of its range until we get more information.<\/p>\n I thought we would test the 4150 level quicker than we did 3900… ultimately range bound between 3900 and around 4200.<\/p>\n But today we’re at 3900… so it’s an opportunity to buy and will become one to sell when it gets back to the upper bounds of that range as well.<\/p>\n Until then, I’d start paying closer attention to the weekly jobs reports and other measures of economic activity.<\/p>\n Remember, data is always stronger than narrative.<\/p>\n Regards,<\/p>\n\n
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