Recession Bells

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We are down bad folks. Sentiment is in the toilet.

Every headline published in the past few weeks has been something to this effect:

• The Worst Start to the Year Ever for the Nasdaq

• Nasdaq Caps Worst Month Since 2008

• Inflation Hits 40 Year Highs

• A Rough 4 Months For Stocks: S&P 500 Books the Worst Start to a Year Since 1939.

• Mortgage Rates Skyrocket at Fastest Pace Since 1994.

• Worst Start to the Year for Bonds Since 1990

And every chart looks like this:

This is just the tip of the iceberg but you get the point—bad news is seemingly everywhere you turn. It feels never ending.

Many of us non-permabears, including myself, figured the snapback rally in mid-March would have at least marked the bottom for the year after the velocity of the selloff we saw in the first 2.5 months of the year. But as soon as April hit, we were quickly reminded that this was just a bear market rally and that more pain was in store for investors.

The 3 major indices performance in April was downright abysmal, with the Dow -4.9%, the S&P 500 -8.8%, and the Nasdaq Composite -13.3%. In fact, it was the Nasdaq's worst monthly performance since October 2008.

Any time you get a reference back to 2008, 1999-2000, 1987, or 1929, you just know it's bad. The YTD chart doesn't look any better as we've now hit fresh lows on the year heading into another Fed meeting next week.

Even though the Nasdaq Composite is in a bear market (20% off the highs) it's still up nearly 90% from the March 2020 lows. It just shows how far we've come and how timing is everything. Someone who started investing in the past year and a half has had a much more difficult investing journey compared to someone who started even just 3 or 4 years ago.

Many market participants are expecting the Fed to hike 50 bps next week. The CME FedWatch Tool now predicts a 97.1% chance of a 50 bps hike. Yields will continue to go higher until morale improves.

Expect volatility to remain extremely elevated next week as everyone looks for additional clues to how the Fed will react to the latest GDP print, low unemployment, high inflation, and if they will formally announce their plans for quantitative tightening. The Fed is definitely in a tricky spot and pretty much every critic expects them to fail spectacularly.

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Recession Bells

To pile on with more bad news, as if the recent yield curve inversion wasn't scary enough, on Thursday the Q1 GDP Print contracted at -1.4% (attributed to temporary trade and inventory challenges). We are now only one quarter away from entering a recession if using the financial press definition (traditionally defined as two consecutive quarters of declining GDP).

The National Bureau of Economic Research (NBER) is generally recognized as the authority that actually defines the starting and ending dates of U.S. recessions. NBER has its own definition of what constitutes a recession, namely “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

So while the NBER does still recognize that most of the recessions defined by their procedures do include two or more consecutive quarters of declining real GDP, it does not happen in all instances. NBER has also stated that they are focused on a host of other economic indicators and also consider the depth of the decline in activity (such as the most recent decline from the onset of the pandemic).

As reported by Axios:

• Trade subtracted 3.2 percentage points from overall GDP growth, as exports fell sharply and imports soared. This reflects a U.S. economy with significantly stronger domestic demand than the rest of the world.

• Inventory adjustments subtracted 0.8 percentage points from the overall growth number. Businesses built up their inventories less rapidly than they had in the fourth quarter, which in the arithmetic of GDP amounts to a negative — but historically does not presage weaker growth going forward.

For more information on the breakdown of the GDP print, check the BEA link below.

When was the last time the Fed hiked 50 bps into a negative GDP print? According to Matthew Miskin: Looks like big rate hikes in '74 and '82 into negative GDP prints, but they reversed course fast into cutting after those periods. Of course the usual sequence is they hike until GDP flips negative.

Tech Root Canal

There really hasn't been many places to hide for tech or growth investors. Even the generals have taken a large hit this year. Just take a look at the FANMAG (such a stupid acronym, can we change this?) stocks below.

FANMAG stocks have combined for a $1.37T loss of market cap in April alone and a total market cap loss of $2.18T since the start of the year. That's a lot of value lost in only 6 names.

As noted by my friend Jay Woods, Meta (I still call it Facebook) is now dangerously close to falling out of the top 10 market cap after losing roughly half of it's value in the past 8 months.

What about everyone’s favorite overcrowded trade ARKK? It has lost all outperformance vs the QQQ since inception and is close to flipping SPY.

In fact, it actually trades closer to the MEME ETF, with more than a 93.5% correlation.

No matter which way you slice it there is pain at every turn. For those with a long enough investing timeline, I'm sure you will look back at this most recent dip as a blessing in disguise.

The simple solution to a bear market is to just continue working forever. We will get through it. Or maybe we will just tweet through it.

That's all for this week. Thanks for subscribing and sharing.