Welcome back Traders,

In our last post we discussed how to decode the market context using macro/fundamentals and technicals. Today we discuss the current market context that we’ve been using to call the bull market. From “How I Make Money by Trading with Context”:

For the next year and a half, the market took off and didn't look back. Even the banking crisis in March 2023 couldn’t stop this rocket. And barring a few seasonal pullbacks, the market "rode" the moving averages to prior highs, then to new all-time highs. This was the golden moment; a new bull market had begun. Anyone still stuck in recession mode (like many economists out there) was now against the context.

1. Macro: Inflation cooling, interest rates falling, Fed pivot, earnings recovery, GDP resumes growth (bullish)

2. Technicals: Strong upward trend, more breadth thrusts, cyclical stocks start to outperform, bullish options activity (bullish)

3. Positions: buying stocks with both fists; we're in a new bull market!!!

Most of those points continue to hold true today. The US economy is resilient, with consumers and corporations still going strong, thanks in part to the lingering effects of fiscal stimulus. Inflation is falling, which should spur the Fed to cut interest rates soon. The technicals are aligned in confirming a bull market. So let’s dive into each of these pieces individually.

The recession is NOT happening

I can’t overstate how many smart, informed pundits (many of whom are well-paid economists at large banks) are still wrong about the recession call. The US economy is resilient, period full stop.

Consumers are: 1) employed; 2) seeing wages rise in nominal terms; 3) have locked in low mortgage rates for the next 30 years; 4) household debt levels are low; and 5) they’re spending, spending, spending even as savings rates dwindle.

Meanwhile, corporations are: 1) still benefiting from price increases which boosted margins; 2) paid down debt using cash flow from the post-Covid years; 3) termed out debt with low interest rates; 4) earning high interest rates on large cash piles; 5) benefiting from high levels of consumer spending; and 6) seeing new productivity gains from Gen AI.

None of these things point to recession. Sure, interest rates are restrictive, but with debt levels low and termed out, no one is feeling pain from higher interest rates. Manufacturing and services activities are chugging right along.

How did economists get it so wrong?

Without bashing anyone, there’s a few common themes that I have observed. Firstly, this economic cycle has been unusual, with an asynchronous slowdown across sectors. Manufacturing was hit first, then tech, then later shipping and commodities while services remained well supported (uncommon in downturns). This has to do with the unevenness of the post-Covid reopening.

Secondly, economists are using outdated models. Not only do these fail to capture the nuances of this cycle, they are over-reliant on yield curve signals. The argument goes, every yield curve inversion (i.e. long-term interest rates are below short-term rates) has portended a recession. But this ignores the fact that the economy is less sensitive to interest rates nowadays, and there is Fed activity artificially suppressing the curve.

So keep this in mind the next time you hear someone calling for an imminent recession. Perhaps a more appropriate framework is one of the following (I’ll elaborate more in a future post):

• K-shaped recession

• Rolling recession

• Inflationary recession

• Recession already happened

Jobs picture is clear as mud