"Fear of missing out single-handedly caused ever single investment bubble in human history. No other emotion is more powerful than FOMO."
-Naved Abdali
If you didn't know that we can get bear market rallies, yesterday's action served as a pretty good reminder. The move in most major U.S. indices was the largest one-day percentage increase since early July 2020.
This morning European markets are back in crash mode, with the German Dax leading the way down over -2%. Meanwhile the U.S. equity futures are down 70 and 80 basis points. In typical fashion, Mr. Market (so far anyways), appears to have sucked in anyone who let their FOMO (Fear of Missing Out) get the best of them.
Interestingly, the term FOMO has only been with us for around 18 years. Author Patrick McGinnis is credited with using the term first in a Harvard Business School Magazine in 2004. The definition of FOMO is as follows:
"A state of mental or emotional strain caused by the fear of missing out. It's also a form of social anxiety — a compulsive concern that one might miss an opportunity or satisfying event, often aroused by posts seen on social media websites."
Did you get that feeling yesterday? If you did get it, you certainly weren't alone. In fact, studies suggest more than 50% of people regularly experience FOMO. But the key is to recognize that emotional angst and then learn to fade it... especially with volume -24% day-over-day yesterday.
Back to the Global Macro Grind…
Data will always set you free from your emotions. On days like yesterday, we often get questions about whether the Fed will pause on their plan of rate hikes and perhaps even implement another round of QE. While anything is possible, that's not what the data is telling us.
As a matter of fact, Fed Fund Futures this morning are back up to 6.31 expected hikes for 2022. This is right near the highs for the cycle and comes after plummeting down to about 4 hikes at the start of Russia's invasion. This morning's CPI report isn't likely to assuage inflation concerns.
Expectations are for a + 0.7% month-over-month increase in CPI for February. Certainly there are some price series that are slowing, such as used car prices, but in aggregate prices have continued to move higher. In fact going into yesterday, the only major commodity that was down year-to-date was Orange Juice.
The major issue with rapidly increasing commodity prices is that they serve as their own form of tightening. Consider that the average American uses roughly 60 barrels of oil per year. Meanwhile the average U.S. income is about $63,000 per year.
From a year ago, the price of oil is up some 70% or around $60 per barrel. So all else being equal, the average consumer will be paying $3,600 more per year on oil consumption, which is just under 6% of the average pre-tax income. You don't need a PHD in economics to realize that unless incomes also increase commensurately (which they are not), a rapid increase in commodity prices is going to be a headwind to discretionary income and spending.
As my colleague Josh Steiner wrote last week:
"There have been 12 recessions since 1946. 8 have followed major oil price shocks, while a further three have occurred immediately following more modest, but still notable, oil price run-ups."
The combination of rapidly increasing commodity prices and rapidly increasing interest are a toxic combination for growth. Can the Fed land the economic ship this time without pushing the U.S. into a recession? As usual, anything is possible, though economic history isn't on their side.
As we get these stock market rallies that rip the faces off the shorts, keep the macro thesis front and center. Has anything changed? To the extent the potential for increasing interest rates and slowing growth concerns you (as it it does us), that certainly didn't change.
This morning we also are back to a number of U.S. equity sectors trading at IVOL discounts. Specifically, Consumer Discretionary $XLY -8%, Tech $QQQ -9% and $XLK -4%, Communications $XLC -15%, Real Estate $XLRE -4%, and Materials $XLB -11% are all at discounts. So even after a one day rally, some level of complacency is priced back in...
Here's a look at the Top 3 Things from Keith McCullough this morning:
1 Day bear market bounce and back to the bear side of NASDAQ (bull side of Gold) we go…
- EUROPE – the nastiest bear markets often have the biggest 1-3 day bounces – European Equities continue to trade, directionally with rates, which makes a tough timing game easier – German and French 10yr Yields down alongside stock markets straight back down for -2% drops on the open. Europe remains in Deep #Quad4 for the next 2 quarters
- #NazVol – don’t confuse my immediate-term TRADE #oversold signals with a change in Bearish @Hedgeye TREND. NASDAQ Volatility (#NazVol) closed at 35.34 yesterday! That’s TRENDING volatility with very complacent options pricing (QQQ right back to an implied volatility DISCOUNT of -9% vs. 30-day realized here – AMZN scores a -36%!)
- OIL – big buying opportunity late in the day yesterday didn’t take long to go green with WTI straight back up +4% here and immediate-term upside in my Risk Range™ Signal to $128.29/barrel WTI; Sector Styles: Energy (XLE) remains #1 on US Equity Risk Range™ Signal Strength, followed by Gold Miners (GDX) at #2
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 2.09-2.33% (neutral)|
UST 10yr Yield 1.67-2.00% (neutral)
UST 2yr Yield 1.41-1.73% (bullish)
High Yield (HYG) 81.48-83.19 (bearish)
SPX 4155-4356 (bearish)
NASDAQ 12,651-13,675 (bearish)
RUT 1 (bearish)
Tech (XLK) 141-153 (bearish)
Consumer Staples (XLP) 72.23-76.85 (bullish)
Energy (XLE) 70.18-79.24 (bullish)
Gold Miners (GDX) 34.73-39.72 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 24,330-25,998 (bearish)
DAX 12,422-13,916 (bearish)
VIX 28.90-38.12 (bullish)
USD 96.99-99.81 (bullish)
EUR/USD 1.078-1.117 (bearish)
Oil (WTI) 104.55-128.39 (bullish)
Nat Gas 4.29-5.12 (bullish)
Gold 1 (bullish)
Copper 4.40-4.96 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
