by Jurrien Timmer, Director of Global Macro for Fidelity Management & Research Company
I donât think I have felt compelled to write an interim update since those scary COVID days when I was writing a WAAR pretty much every day for 4 weeks straight. But times like these require a high frequency update.
The S&P 500 is now down 12% from its high. Thatâs still within the garden variety 10-15% range, but nothing about todayâs price action feels garden variety.
The two places to hide during this storm have been bonds and gold. The new odd couple!
As the next chart shows, we are in that grey zone when it comes to trying to handicap what the marketâs next 10% move is. Some corrections reverse quickly, while others keep going and turn into bear markets. The big question becomes how much bad news gets priced in. As I wrote on Sunday, the market was priced for a slowdown but not a recession. That may well be changing now.
My âwhat happens after a 10% correctionâ chart from Sunday seems to have spoken, and my guess is that we will probe the 10-20% correction range from here. The 1998 LTCM analog continues to track, even though todayâs cycle has little in common with that one, other than a massive repositioning out of crowded trades.
How do we know whether enough bad news has been priced in to take the other side more confidently?  Credit spreads are often the canary in the coalmine, and they are indeed widening now. But investment grade spreads remain relatively calm at 139 bps.
High yield spreads, on the other hand, have widened considerably, from 294 bps in January to 425 bps. This is reminiscent of the growth scare we had last summer, when on the heels of the yen carry trade unwind the markets were pricing in a slowdown.
Meanwhile, the VIX seems relatively chill here at 29. Most of the vol spikes since 2021 have been rate shocks or rate scares, but like last summer we are in growth scare mode now.
Rates are speaking loud and clear here, with the 10-year yield testing the 4.0% level. More rate cuts are being priced in.
Perhaps the oddest and possibly most disturbing chart is the US dollar. Itâs very out of character that the dollar would fall so much at a time of stress.
As the weekly chart shows below, since the GFC risk-off periods have meant a stronger dollar. Today, the dollar is weakening and its correlation to the stock market has gone from very negative to flat.
Frankly, this pattern scares me a bit, as it suggests that the world is not only de-globalizing but perhaps also de-dollarizing. A de-dollarizing world is extremely bullish for gold, so perhaps itâs not a surprise that gold continues to climb.
Looking at the S&P 500, if there is a silver lining out there itâs that some bullish divergences are popping up on the daily charts. Both the 50-day and 200-day breadth stats are diverging from the new price lows. Weâll see what the weekly charts show this weekend.
And here is the Mag 7, the center of this top heavy storm.
More to come next week.
This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.
1188536.11.0
Copyright Š Fidelity Management & Research Company
