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.

We often face skepticism when we label the period from November 2021 to now as a bear market. While a 20% drawdown is typically the benchmark for a bear market, we also consider the rate of change in earnings, GDP growth, and credit. Technically, the Nasdaq has re-entered a bear market with a decline of -21.5%, and the mega tech stalwarts are revealing significant vulnerabilities. Let's briefly review the last major Fed tightening cycle and underscore the similarities.

Current Bear Market Resembles "Conundrum" of 2006 - 18

Reflecting on 2006, we see conspicuous similarities to today. The Federal Reserve, targeting inflation, gradually raised the federal funds rate, but long-term rates remained unmoved. This anomaly, termed the "conundrum" by then-Fed Chair Alan Greenspan, stemmed from shifts in the relationship between these rates since the late 1980s.

Despite the looming financial crisis, rising home values led many to refinance, turning home equity into spending and an economic booster. This cushioned the economy, potentially averting an earlier recession in 2006. If you remember, the S&P 500 rallied in 2007 much like we have to start 2023. In November 2007, we started to see a cranky bear wake up for winter and not hibernate.

Drawing a parallel with the present, the surge in net financial transfers from federal government deficits, fueled by massive issuance of Treasury securities, can be likened to the 2006 cash-out mortgages. In this context, the whopping $2.02 trillion in deficit spending acts as a temporary lifeboat, keeping the economy afloat amid rising interest rates. However, like in 2006, this approach seems untenable, especially given the sheer magnitude of current spending.

Learn more about the Market Situation Report written by Tier 1 Alpha.


See all upcoming events at Hedgeye here

Hedgeye Education Center