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The New Bull Market



*Bitcoin performance tracked over a 7-day period ending 14th August 2022


REBOUND RUN

A sea of green on wall street this week as easing inflation figures raised hopes of a soft landing. In this goldilocks scenario, the Fed would be able to increase rates just enough to restrain price increases without causing noticeable damage to the real economy.

However, market exuberance slowed somewhat this week relative to the bullish sentiment of recent weeks. The Dow and S&P 500 finished the week little changed, while the Nasdaq escaped the clutches of a bear market following its 2.2% return.


NASDAQ Climbs Out of Bear Market Territory


Source: Refinitiv

For the S&P 500 and the NASDAQ, it was the fourth positive result in a row. The longest string of weekly gains since November 2021.

The S&P 500 is now up 16% following the mid-June lows, clawing back over half of the recent losses as optimism trickles back into markets.


FUN WITH NUMBERS


Both the beauty and delusion of economics is that it’s based more on interpretation than fact.

You can somehow be right and wrong at the same time depending on peoples reading of the data.

There are rarely precise winners and losers in the long run, and everyone gets a medal for participating.

This is part of what makes market timing so difficult.

The greatest example of this was in 2013 when the University of Chicago’s Eugene Fama and Yale’s Robert Shiller were both awarded the Nobel prize for economics for essential saying the exact opposite thing. (I exaggerate, but only slightly)

In short, Fama argued that markets were perfectly efficient, while Shiller argued that investors, being human, can be swayed by psychology, and this irrationality makes markets inefficient.

Both men were deemed correct yet held deeply opposing views.

I fail to think of any profession where this level of disparity of thought exists.

The toxic downside to this is data can and will be twisted and manipulated to fit a specific narrative: Interpreted in a way that best frames an individual's overall thesis.

We see this play out all the time.

Consider the recent U.S Jobs report for July.

Last week, the U.S jobs report showed a gain of 528,000 jobs in July.


U.S Jobs Report Shows a Gain of 528,000 in July


Source: Bureau of Labor Statistics One interpretation could conclude that the strong labour market and the return to pre-pandemic employment levels suggest a robust and resilient economy, easing recessionary pressures.

On the other hand, one could easily argue that labour market strength will force a wage-price spiral and exacerbate the current inflationary problems. In turn, forcing higher interest rates and harsher economic conditions in the future.



Two vastly different interpretations of the same data point.

Part of what makes data analysis such a minefield.

This also played out in a more selective manner following this week’s CPI report.

With White House officials proclaiming 0% inflation in July, critics quickly pointed out the White Houses’ use of the more favourable month-over-month figure while the year-over-year figure was 8.5%.


Both figures are technically accurate. But they each lead people to very different conclusions.


Each side selecting the data that best facilitate their individual arguments.

Beware of the pseudoscience. Selection bias is everywhere.

In short, It’s easy to get caught up in the numbers, but don’t overweight your convictions towards short-term data trends that can be easily manipulated to fit a specific narrative.

Crucially investors should ignore much of the noise that short-term data creates and focus instead on understanding what data tells us about the long-term themes that drive the markets and the economy over relatively long investment time horizons.


Trends in earnings growth is one that springs to mind.

Always focus on the bigger picture.


OUTLOOK

It’s tough out there right now for investors as stocks continue to swing wildly on a daily basis. With that said, the VIX has pulled back and slowing U.S inflation has given the FED some room to breathe.

Undoubtedly, the improving inflation outlook is positive, and we believe that improved supply/demand imbalances, accompanied by broadly lower commodity prices since June, should support moderating inflation over the coming months. Still, it’s hard to give the all-clear for markets just yet.

While the probability of a soft landing has increased in recent weeks, the Fed’s tightening cycle will continue unabated until a figure resembling their 2% target is reached.

This will likely lead to further softening of economic data, a trend that will become more prevalent over time.

Price fluctuations are likely to continue, however, future pullbacks should signal buying opportunities, not panic selling.