The Secret History of Corrections

When it comes to financial markets, do narratives really matter? Or do patterns, the rhyme of bull runs and corrections, mark the true path of stocks and bonds?  

With Ukraine on the brink of war, inflation at 7.5% and consumer sentiment falling into the sea, all signs point to downside in the stock market. But do these themes actually predict anything? 

Narrative or not, the S&P index is repeating a pattern that it showcased in 2018 when the Fed tightened, inciting a sharp sell-off. This makes it more likely than not that a similar sell-off is just beginning. For us, it is time to hedge that downside in the guise of our old nemesis: SPXS. 

As the great Jim Bianco put it, the Fed must now make a choice. Stem inflation or let the market melt up higher. It can not do both. And the political tide is moving inexorably in the direction of everyday Americans at the expense of wealthy elites.

Not that any of that actually solves the root problem, as Alex Gurevich points out. Inflation is a symptom of supply shocks as much as it is excess liquidity. Stretch this out on the horizon to 2023, and we might actually be tightening into an inverted yield curve and a recession. But those are problems for another year.