Wednesday's Market Minute: Corona Hangover Is Just Beginning

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Remember “Corona?” We always knew that label would lose out to the beer. So naturally, everyone stopped saying it. Except Davey Day Trader Portnoy. His last video was December 15th. Trading hangover kicks in early when you pick stocks out of a Scrabble bag, but eventually it comes for all of us.

The rolling bear market that began a year ago as an otherwise mundane sell-off in Cathie Wood’s famed ARK fund is enveloping more sectors and investing themes by the day, and it’s only getting worse the more it looks like we defeated COVID for good. Surging commodity prices are turning a daunting task by the Federal Reserve into a seemingly impossible one. Markets are telling us the odds of a COVID Hangover Recession are rising dramatically.

One flashing neon sign is the 60% year-to-date advance in the price of crude oil, which is not as surefire a recessionary indicator as the Treasury yield curve, but has a nasty habit of inflicting economic malice when it goes up too fast. Speaking of the yield curve, Jay Powell’s about to begin a tightening cycle with the flattest 2s-10s spread ever at the onset of interest-rate hikes, Schwab’s Fixed-Income Chief Kathy Jones told me yesterday on Market on Close. The Fed cut rates in 2019 during the loosest financial conditions on record, and now they’re hiking with some of the tightest. Not exactly confidence-inducing. 

Neither is the latest iteration of equity market weakness. Financial stocks took a beating the past three weeks and the mighty homebuilders have been ground up into tasty little bear-bites. Semiconductors are barely hanging on. The biggest bull case for the economy is the fact that American households exited the quarantine era with fortress balance sheets – yet shares of consumer king Amazon just made a fresh 52-week low yesterday. Nike, too, now down 32% from its high.

That so many good companies with powerful growth stories are still being punished without relent is testament to how big a valuation bubble was created by COVID-era economics. The deepest, most entrenched sell-offs in this market began long before Russia invaded Ukraine; that conflict’s repercussions are an additional complication this economy does not look ready to handle.

There are a few decent reasons to think risk assets could be poised for a near-term relief rally: there’s a good case for Nasdaq support at 13,000, crude oil finally faltered on Tuesday, and staples stocks had a chunky sell-off. Bitcoin is bouncing after a pretty innocuous statement from the White House. But 10-year yields are waking up in the background back near 1.9%, and that’s what popped the bubble to begin with. 

A ceasefire in Ukraine would be a miracle, but it’s important to recognize we do need something like that to divert us off the path toward a double-dip recession tied to lower asset prices and inflationary hangover from the COVID era that is now exacerbated by the most distressing European conflict since WWII.

Image sourced from Pixabay

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.