Defensive behavior predictably resumes after a long weekend. However, it has a couple zingers thrown-into the mix, even if financial press extensively is focused just on Twitter/Musk, inflation, and the impact of hawkish monetary or Fed policies. Peak inflation probably relates to China more than even Oil now.
So today Goldman came forth with a 35% Recession probability call, and that is reasonable. However what's missing from such forecasts is understanding the degree to which most non-big-cap Index stocks 'already' discounted that. I also don't imagine the Fed is as ignorant as some think, which would be their hiking rates 'into the face of slowing growth and dissipated optimism'.
From healthcare, to EV's, to innovative small companies, they are pummeled and have been flat-lining or slightly eroding for months at this point. To some extent the S&P has been swinging relative to Tesla (TSLA) shares envisioned as the capital-source for Musk to get Twitter (TWTR), but as the poison-pill was implemented on Saturday, that prospect predictably suggested Tesla would rebound a bit.
It is the pressure on the consumer that really matters domestically, and that's not going to vanish immediately. Demand doesn't dissipate until it must, and I do suspect many average people 'are' constraining their driving and such, but we didn't see any of that over Easter weekend, since plans (and flight tickets) were arranged weeks or months earlier. And it's a bit ludicrous with respect to dividing the Country. Frankly many hotel chains really can't make it for long if you they hold-out for 'rack (standard) rates', which you'll see as discounting in a subtle way returns. That's already the case for transatlantic business flights, and even economy, when you look to book beyond Summer into off-season.
Certainly China continuing the absurd lockdowns along with denying licensing with European or American big-pharmas for 'presumably effective' vaccines, I know is a problem. At this pace whether it's Apple or Chinese EV batteries, it will be months before things normalize, even if COVID and Oil prices drop.
Was this a 'tax day' decline? Sure, but that's now the frenetic aspect. While an intraweek rebound might transpire, there won't be more unless macro shifts in the very near future occur. If there's something else like a panic out of bonds, it becomes a shock at first, and then eventually provokes equity buying.
In-sum:
Things are tricky with elevated inflation and suppressed bonds, but a continued bifurcation of stock sectors, as we've often referenced. Rising rates won't prevail for long (despite 'tough talk' by Fedheads) if you get 'stagflation' in a more visible way (it's been ongoing for some time in a sense).
Fed-tightening is partially in the market, St. Louis Fed's Bullard finally shifts a bit to this viewpoint, and that might get a slightly dovish pivot late this year, or they might continue to treat the 'balance sheet' differently than they speak about monetary policy.
Energy is the key influencer of the PCE and CPI even if not officially focused on (for years I bemoaned the so-called 'adjusted' for x-food and energy which is crazy) with some statistics. That's because they want to suppress reality as it would influence the Cost of Living adjustments for Social Security next year.
Jim Bullard saying 'he's sympathetic to markets' (hardly as in another breath he says he'd not be opposed to a 75 bp funds rate hike), but also says there's a prospect the market has 'priced-in' the Fed's hikes. Hard to say, hyperbolic and a bit contradictory, but he might be reflecting early jitters among the Fed heads, realizing that there are variables that can impact them, so less rigidity.
Aside Russia, China, COVID, and so on, Bullard was the story today. He's way above where the average Fed President has been in interviews, but even if he gets the FOMC to go as far as he's envisioned, that doesn't mean it starts any trend, but might end it (conceivably with a big-cap S&P selling climax).
Bottom-line:
Only mega-caps have cracked a little bit, or trading to perfection, like an Apple (AAPL) or Microsoft (MSFT). A lot of 'risk' is priced-into smaller stocks, with lots of existential influences (like the Chinese headwinds) repressing everything.
Lots of the big stocks could drop another 10% easily, and the Indexes too. For sure that doesn't mean they will, but could. Under-performance in mega-caps is likely, and money has been (as often noted) 'hiding-out' in those beloved at the same time overpriced, stocks. If they break it might actually be 'final shoe' time, but it's a process, and could take months.
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