Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.
It's been some time since we showcased this bonus chart, which displays a distribution of SP500 returns around Fed tightening cycles. Throughout most of 2022, we observed returns hovering around the lower 5th percentile. Intriguingly, 2023 brought the market back in line with the average performance seen during rapid tightening cycles.
Historically, Fed tightening cycles often serve as a prelude to recessions. Recessions typically emerge during the shift from an inverted yield curve back to normalization or steepening. Our next version of this model will delve into SP500 returns in the context of recessions.
The mean reversion seen in late 2022 and 2023 was synchronized with the US economy's addition of $2.4 trillion in 2022 and $2.2 trillion in 2023 through deficit spending. Parts of this spending, like the Inflation Reduction Act, Employment Retention Credit program, and student loan forbearance, had direct stimulative effects. Notably, the "emergency" BTFP lending initiative seems set to become a permanent fixture because why not?
For now, we are seeing a bear steepening in the curve, bank lending standards tightening to 2001 levels and headed to 2008 levels indicative of escalating counterparty risk and, most importantly, no marginal fiscal stimulus to be added. We will follow the flows as always, but the macro picture is rough.
Learn more about the Market Situation Report written by Tier 1 Alpha.
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